Schwab finally launches alts to retail investors with $5 million, five years after initial iCapital deal, but just seven days before its CEO faces Wall Street

Charles Schwab & Co. finally has hedge funds sitting next to mutual funds on its do-it-yourself retail platform – very late, but also just in time.

The Westlake, Texas brokerage today (Apr. 10) announced that Schwab Alternative Investments Select (SAIS) went live to investors with at least $5 million in assets at Schwab. SAIS is a private label for iCapital, which it first signed on back in 2019 as a vendor for RIAs.

Schwab RIAs currently manage about $58 billion of alternative assets held at Schwab, according to the release. Over 37% of advisors who custody at Schwab use an alts platform, including Schwab's alts OneSource, the fastest-growing platform among the firm’s RIA clients.

Long known as a “discount broker” serving the mass market and mass-affluent ($1 million or less), the vast majority of Schwab's investors today are safely in the high-net-worth or ultra-high-net-worth categories.

It explains the composition and timing of today's rollout, according to Jonathan Craig, head of investor services at Charles Schwab.

“Schwab serves more than a million multimillionaire investors, representing over $3 trillion in assets at Schwab," he says in the release.

Wall Street waiting

For now, Schwab's program includes a “curated shelf of third-party alternative investment funds across select asset classes, including private equity, hedge funds, private credit, and private real estate,” the release states.

Next up will be “exchange funds,” better known as swap funds. The private investment vehicle allows investors with concentrated stock positions to diversify their holdings without triggering a taxable event, the release adds.

“Standing behind each of those categories, we've hired a team of alternative specialists that are available to spend time with our clients to help them answer their questions,” said CEO Rick Wurster at the Jan. 21 winter update.

No doubt Wurster and chief financial officer Mike Verdeschi are relieved the alts retail program has been launched. 

The Spring update is just seven days away (April 17), and alts were the major promised deliverable.

Table stakes

Whether retail clients truly want alts in any great quantity remains unknown. But early signs suggest an interest exists.

“More than half of Schwab clients expect to have at least 5% of their portfolio allocated to alternative investments over the next three years,” according to a recent survey of Schwab’s HNW clients.

Scott Smith, Cerulli senior analyst in wealth management, notes this dichotomy of alts as a managerial “proof point” and a needed product.

“As platforms across the industry look to address the growing U/HNW wealth management market, alts are becoming table stakes,” he says by email.

“Not so much through widespread investor demand, but to both serve as a proof point that the firm is offering world-class services and appeal to those investors who have identified themselves as alt-interested.”

Fiduciary concerns

But an alts executive says Schwab going directly to investors presents a thorny issue -- no RIA is present to absorb much of the fiduciary responsibility.  

How exactly iCapital and Schwab plan to split that duty is unclear.

There's another unspoken matter about alternative investments, says Smith. 

“To me, the most important point that seems to be being overlooked is that being an 'alternative' investment is not by itself a mark of quality or inflated expected returns,” he writes by email.

Diminished returns

“Yes, everyone is adding them, but due-diligence is notoriously difficult, and there are plenty of bad alt offerings as well,” he adds, “along with no definitive evidence that they provide better risk-adjusted returns.”

Large endowments, for example, had an annualized return of 6.9% over the past 16 years, compared with 9.3% for an equally weighted index of stocks and bonds, according to a FundFire article's main data point.

Hence, alternatives reduced endowment performance by 2.4% annually, according to the article by Richard Ennis, founder and former chairman of investment consultant EnnisKnupp.

“Alternative investments can be a useful portfolio tool, but they are far from a panacea for addressing HNW investors,” he wrote in the Fundfire article [ note: paywall].

Thinned expertise

Though Schwab has reacted well to providing more advice, it has been slower with advice -- often including alternative investments – geared specifically to the ultra-wealthy.

It also let go many of its original alts team members when it laid off 2,000 staffers in Oct. 2023.

Schwab departures considered hard to replace include Tim Rolfs, a director of Schwab alternative investments and structured product solutions.

That is now changing, says Neesha Hathi, head of Schwab Wealth and Advice Solutions at Schwab in a release.

Schwab clearly has a large and growing staff for servicing clients that use alts.  

“As our large and growing HNW and UHNW client base continues to turn to Schwab to meet a broad array of wealth, advice, and investing needs, we are committed to continuing to expand our capabilities," she says.

"We’re excited to now offer eligible retail clients access to a growing alternative investments platform, along with the specialized expertise, service, and support we know they deeply value.”

Megatrend

Schwab’s HNW and UHNW clients, who are among the fastest-growing client segments at Schwab, represent more than 66% of the firm’s total retail client assets today, the release states. 

Schwab's total “investor services” assets, as of Dec. 31, were $5.7 trillion and its “advisor services” assets were $4.4 trillion.

Schwab's growth upmarket is part of a larger mega-trend noted in Cerulli reports, where Fidelity, Schwab, and Vanguard are finding surprising full-service success.

These “direct” firms, founded as “discount brokerages,” have seen their share of the wealth market hit 26.4% in 2022, up from 22.5% in 2017, as they push into the hottest channel of all – discount wealth managers, according to Cerulli. 

It all creates a dilemma for RIAs, says Mark Tibergien, a consultant in Seattle and former head of Moss Adams Consulting and Pershing Advisor Solutions.

“What this [presence upmarket] validates is that Schwab has become one of the most prominent and formidable brokerage brands in the U.S. But that's not an overnight thing.  This has been building for decades.”

Feeding the monster

“Their migration up-market is a natural evolution in their business model and is clearly supported by their marketing messages and advertising,” Tibergien adds. 

“The dilemma for RIAs who use them as their custodian is that they may be feeding the monster that will eventually eat them.”

“At a minimum, it puts pressure on advisory firms that don't have a retail brand to find ways to separate themselves from the brokerage model in general, and a well-branded name itself.”