Altruist promises 'NASA-like precision' with sweep-cash funded margin loans, aiming to solve the tax-aware long-short SMA bottleneck frustrating RIAs at Schwab and Fidelity

Altruist is launching an in-house lending network as part of a plan to radically undercut Schwab and Fidelity on margin loans as a foundation for a better long/short SMA mousetrap.

The Culver City, Calif., RIA custodian just announced margin lending for RIAs, using RIA sweep balances as the capital source – and an Altruist-hosted, lending system to cover the rest. See: Schwab and Fidelity beat Goldman Sachs to the punch on long/short fund sorcery.

“It requires NASA-like precision; you can't get buying power decisions wrong, or allow infinite leverage," acknowledges Altruist CEO, Jason Wenk, in an email.

NASA-like precision? What could possibly go wrong? Oh, right… remember, “Houston, we've had a problem?”

“Is there a risk there? Only if the competition wants to race you to the bottom in terms of rate, which doesn’t seem terribly plausible in this case,” says Andrew Besheer, founder and principal of Bronxville, N.Y. consultancy Besheer & Associates, in an email.

RIA payoff

It sounds a little like peer lending, which got hot in the aughts when LendingClub and SoFi, two big names in the category, emerged. They took off after the 2008-09 financial crisis, when confidence in banks took a major hit. 

But individual investors often faced heavy losses because bad debts ate into their profits and risk was hard to calculate. The "P2P" concept got rebranded into “marketplace lending.” The digital loan brokering stayed in place, but in reality Wall Street banks, and hedge funds rather than “peer” consumers provide the cash. 

What Wenk is counting on is a cooperative spirit among RIAs to support each other's capital needs because there won't be financial incentives when the program launches in September. 

Lower fees

And this is not actually peer-to-peer lending, he says.

"Nothing we are doing is considered peer-to-peer lending. All brokerage accounts come with either an FDIC sweep option or a non-FDIC cash option. 

"When choosing the non-FDIC cash option (free credit cash) this allows all brokerages to use those balances for things like margin lending. I just want to be clear that it’s nothing unique to Altruist and something that every major brokerage does.

“If a customer (not an RIA) chooses to opt out of FDIC cash sweep they default into free credit balances (this is true at all brokerage firms). These balances are always the first principal amounts used in margin lending.”

“What is unique, is that we are giving the bulk of the benefit to the customers by not charging egregiously high rates. Everybody could do what we’re doing they just choose not to, to enhance their profits at the expense of the end client.”

Critical item

Advisor clients will get a standard sweep rate [3.5% currently] regardless of whether their cash is parked with a bank or loaned to a fellow RIA's client.

And, they'll be flying without a net – no $250,000 or more in FDIC insurance that applies to regular bank sweep accounts. 

Still there is a bigger payoff for RIAs if the peer lending network clicks. It will fuel an affordable long/short SMA program.

“This [margin lending utility] was a critical item [for Altruist] to be able to compete,” says Besheer. 

“It’s a key component of setting up the long/short business, [because] you have to support margin … [and] long/short SMAs are highly in demand by both RIAs and wirehouse advisors," he adds.

Asset magnet

Wenk acknowledges the margin mechanism is “a very complicated product to build, [which] impacts nearly every surface area of a brokerage platform, [including] behind the scenes ledgers, back end calculation engines for buying power, IRR calculations, fee calculations, front end web and mobile applications.

“This has been a multi-year build, from scratch, designed to be a market leading feature,” he says. “It unlocks multiple other products and features, such as options trading and eventual short-selling needed for tax-aware long/short portfolios.” 

Long/short investing is a proven magnet for RIA assets for the two-for-one of generating high returns and offsetting client taxes through short losses. See: Schwab CEO ties his firm's blowout RIA custody asset quarter to Fidelity's long/short fund rethink.

“Custodians have many reasons to limit [long/short SMAs, which] carry risks that all end clients may not understand, are operationally complex, and require free credits or access to margin loans. 

"We're trying to be thoughtful upfront, [so] we avoid making changes later, which is currently frustrating many advisors,” Wenk said. See: Schwab RIAs get a shorter leash, again, on long-short funds.

Holding onto gains

Wenk says his firm is "indifferent" to where RIAs park their cash, and that rates "will remain the same, regardless of opting into free credits vs FDIC sweep – but it will guarantee Altruist's higher-than-average sweep yields

Altruist pays out a standard 3.5% to investors holding uninvested cash in its sweep accounts, compared to 1.84% through Fidelity FCash, and between one-and-10 basis points through Schwab. 

“We can offer higher rates on cash than most by having products like margin … The already higher rates are a byproduct of this and other product innovations,” he said.

Margin lending gives clients a means to raise fresh cash without selling prior investments, and, since they're borrowing, rather than selling, it doesn't trigger tax, allowing investors to hold on to unrealized gains, Wenk adds.

'Infra dig'

It is also no surprise that Altruist is has launched margin lending at an extremely competitive price point, says Besheer.

“These rates are designed intentionally to be below market as a driver for growth … [and] undercutting the competition has always been the way of the scrappy upstart,” he explains.

Altruist is not acting in a vacuum. TradePMR announced reduced margin and securities-backed lending rates starting between 3.95% and 5% in in July at SYNERGY26. also as a lever against Schwab and Fidelity's double-digit lending yields.

Wenk says he finds the idea of charging the highest fees possible a little infra dig, too.

“I can't say why others charge a lot more, but our goal is to help create the best possible outcomes for end-clients, and charging unnecessarily high margin rates does not fit with our mission,” he explains.

When, not if

When Altruist launches full support for long/short investing -- if it gets it right -- it will drive net new custodial asset flows, Besheer says. See: Charles Schwab Corp. touted long-short RIA accounts to Wall Street as a hot new 'win-win' revenue source.

“The strategic rationale [behind launching margin lending] speaks to … the importance of long/short SMAs,” and restrictions on the tax-aware trade imposed at every RIA custodian bar one – Interactive Brokers – have frustrated a number of RIAs, Besheer adds. 

“I've [even] had a large RIA aggregator tell me [long-short restrictions are] a complication in their relationship with their primary custodian," he adds. 

Altruist has yet to announce support for short-selling, but a company disclosure notes that its securities lending service can facilitate short trades.

Altruist has yet to formally update the timeline to service the long/short trade, but with margin lending now in place, only one domino is left to fall -- short-selling. See: Fidelity and Schwab embraced long-short SMAs, until surging RIA demand proved too much of a good thing.

"We do not currently support long/short SMAs because they require margin and short selling," Wenk explained, in a May 19 email, prior to the firm's launch of margin lending.

"We plan to release … short selling later this year Once we do, we also expect to support long/short SMAs.

Why so long?

Altruist's latest upgrade will likely open green pastures. Though its efficiencies may surpass legacy custodians, big RIAs tended to take a pass because compulsory services – with margin lending a giant one – simply did not exist. 

It was gap that was filled by Pershing before the two firms ended their clearing relationship. See: Altruist drops news on former SSG RIAs -- they must leave Pershing by November for Altruist or third-party custody, catching many by surprise

Since Altruist's founding in 2018, a number of leading RIA executives have hesitated to custody with the firm, stating it lacks the service breadth needed by RIAs with a roster of ultra-high-net-worth clients, or an overall asset base in the tens of billions of dollars. See: Peter Mallouk is exploring new RIA custody vendor for his $300-billion firm, despite new Fidelity referral deal; this time around upstart brands are in the running.

It's a major infrastructure boost, says Will Trout, director of securities and investments and Datos Insights, in an email.

"Margin is really infrastructure for what comes next, not a standalone feature,” he explains.

Banking license?

The in-house lending marketplace will need to work. Altruist does not want to take on a bank charter.

“We have no plans or interest in a banking license at this time,” Wenk says.

Indeed, for now, should Altruist prove unable to source the funding for a whole margin loan from among its RIA custody clients, Altruist will rely on its pre-existing banking partners.

“The loans are initially made through free credit balances, then through various banking partners,” Wenk explains.

Long-term, Wenk could reconsider his position, because there are sizable advantages to running an in-house bank, once a custodian is over a certain size, Besheer explains.

"A banking license is a level of additional regulation that Altruist doesn’t need at this point in their development, [but] I might not rule it out as categorically as Wenk did. 

“It would potentially make some real strategic sense as they gain scale."