Consolidation in the asset management industry continues with Morgan Stanley (MS  ) buying E-Trade (ETFC  ), and Franklin Resources (BEN  ) buying Legg Mason (LM  ). Now that low-commission trades and low-cost ETFs have become the norm, asset managers with the most assets have a natural advantage. Additionally, investors are moving from higher-margin active products to lower-margin passive products. Smaller asset managers will be chopped up by these trends.

Franklin Resources

Franklin Resources bought Legg Mason for $4.5 billion. Their combined assets will total $1.5 trillion which makes it the sixth-largest asset manager in the world. Interestingly, both companies' shares were higher following the deal - 23% for Legg Mason and 12% for Franklin Resources - which indicates that the market sees the combined entity as more valuable than each operating individually.

Legg Mason manages around $800 billion in assets under nine different investment managers. Franklin Resources will keep this structure in place. Franklin Resources has more of a global footprint, while Legg Mason dominates in the US. Legg Mason is tilted towards institutional clients, while Franklin Resources' assets are 70% retail. Both are heavily concentrated in actively managed products but have introduced a whole slew of passive products in recent years.

Morgan Stanley

Morgan Stanley also bought E-Trade for $13 billion. Morgan Stanley is hoping that it can upsell its services to E-Trade's 5.2 million customers and make them into customers of its wealth management services. In some ways, it's a gamble for Morgan Stanley especially in an era where trading commissions are declining.

Despite E-Trade's struggles to make up revenue lost from commissions, it had a number of suitors besides Morgan Stanley including Goldman Sachs (GS  ). Negotiations intensified following Schwab's (SCHW  ) purchase of TD Ameritrade (TD  ). For E-Trade, the company is able to gracefully sell itself before it would have to cut commissions further to keep customers or keep its commissions and lose customers. Given its relatively small size, it would not have been able to survive a price war with larger, better-funded competitors.

Looking Forward

E-Trade was in trouble as technology was undermining its biggest source of revenue, and competitors were coming for its margins. Morgan Stanley saved it, because it's hoping to sell its higher-margin services to E-Trade's customers.

Franklin Resources and Legg Mason are active managers in a world going passive. The deal allows them to be bigger, more global, and cut costs as it attempts to make this transition. Most importantly, it gives them more time and resources as it looks to be one of the winners in the asset management world.