Schwab Plans Tax-Aware Long-Short Strategy Amid Rivalry Questions

Charles Schwab plans to launch its own tax-aware long-short strategy after raising the minimum investment for similar products from outside asset managers to $10 million. The plans have prompted questions about competition between Schwab and third-party providers.

Chief Executive Rick Wurster discussed the planned offering during a recent earnings call in response to a question from UBS analyst Mike Brown. “I do expect us to have an offering,” Wurster said.

He said the strategy would help clients turn stocks and other assets into cash while giving Schwab a way to support long-short investing over the long term. The firm has not announced a launch date or minimum investment. Wurster said more details would be provided during future earnings calls.

Schwab recently raised the minimum for clients seeking long-short strategies from outside asset managers to $10 million, up from $1 million. The firm also limited inflows, saying it needed enough operational capacity to support the strategies.

The difference between the minimum for outside products and the minimum for Schwab’s planned offering could affect how the products compete. Brent Sullivan, an independent tax analyst, questioned whether Schwab would set a lower minimum for its own strategy or reserve access to outside managers for clients with larger accounts.

“If the minimum for Schwab’s product is $500,000 or $1 million, it starts to look a little competitive, especially versus the third-party managed solutions, which a lot of advisors and investors really like,” Sullivan said.

Sullivan also raised questions about whether Schwab’s financial consultants could have incentives to recommend the firm’s strategy over competing products. A Schwab spokesperson declined to comment beyond the statements made during the earnings call.

Long-short strategies have grown as investors look for ways to reduce capital gains taxes after years of market gains. Schwab’s margin loan balances nearly doubled from a year earlier to $188 billion in the third quarter. About $61 billion was linked directly to long-short strategies, according to Sullivan’s research. Asset managers now oversee about $190 billion in such strategies, up from slightly more than $1 billion five years ago.

These strategies typically use borrowed money and a mix of long and short investments. The resulting losses can offset taxable capital gains. Investors with appreciated holdings may use them when traditional tax-loss harvesting provides fewer opportunities.

Leverage can increase losses as well as potential tax benefits. Michael Kitces, founder of XY Planning Network, has written that an investor could be worse off if a leveraged strategy performs poorly enough to outweigh the taxes that would have been paid by selling an appreciated asset.

Other firms have restricted access to the products. Fidelity Investments said in February that it would indefinitely prevent clients from opening new long-short accounts. Brad Wales, founder of Transition to RIA, said Schwab could be seeking greater control over the risks and liabilities associated with the strategies while creating a potential source of revenue.

“Saving money on taxes is something our clients love to do,” Wurster said during the earnings call. “That demand is likely to continue.”