Last week, ears pricked up all over the industry after Charles Schwab said it would start offering alternative investments to a certain level of qualified retail client by the end of the year. The firm made the announcement during its May 22 “Institutional Investor Day.”
Since 2019, customers of Schwab's RIA business could avail themselves of alternatives through a partnership with iCapital. But Schwab, like many other firms, has been somewhat cautious about unleashing these specialized opportunities on self-directed investors (who, by most accounts, should not have more than 5% or, at most, 10% of their individual portfolios in alternatives).
Until recently, large custodians and asset management complexes have feared the potential for misuse, and therefore risk to the firm, has been too high. But in the last year, several major fund groups including Fidelity have added 5% allocations of alternatives to their target-date fund 401(k) lineups.
To keep its position among investors who are now being offered many avenues to invest in these vehicles, however, Schwab had to jump in the water sometime. The new Schwab program will include third-party alternative investment funds in private equity, venture capital, private credit and hedge funds, said a spokesperson for the Westlake, Texas-headquartered firm.
And now it’s been revealed that iCapital, which has a long-term relationship with Schwab, will be the intermediary provider of that access.
“Across Schwab, whether it's our investor services business or advisor services business, we are always listening to clients and what they want from us in terms of services,” said Jon Beatty, chief operating office of advisor services at the firm. “Alternative investments [are] a critical part of product for affluent investors. So I think we're responding to feedback from our retail clients and building capabilities that they want from us.”
According to the spokesperson, access to alternative investments will be introduced in phases for qualified retail clients with more than $5 million in household assets held at the firm.
Besides giving affluent investors access, the offering may also keep investors with less in assets around long enough for them to grow into the qualifying criteria. According to one industry veteran familiar with Schwab’s retail business, self-directed investors there who grow their assets on their own to around $1.5 million to $2 million typically move at least some of their assets to an advisor in order to get a second opinion and access “next level” opportunities.
By offering those opportunities itself, Schwab might stem that tide, the source said. In reality, most affluent families with $10 million or more have multiple seven-figure brokerage accounts, some of them with advisors and some with self-directed brokerages.
“We know that the high-net-worth and ultra-affluent have taken quite a liking to alternative investments as a way to round out their portfolios,” Beatty said. “Schwab is focused on serving investors at all means along their path of financial security.”
Qualified DIY investors with a sense of adventure will have the freedom to invest at will, and their more conservative peers, perhaps nervous about venturing into the alternatives space alone, will always be able to access a Schwab RIA fiduciary.
“We love the fact that we have all that optionality,” Beatty said.