When Charles Schwab executives talk to the RIAs they work with, one of the biggest requests is for lending services that would prevent them from having “to introduce a bank.”
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So said Schwab CEO Rick Wurster on Thursday at the firm’s annual institutional investor day at its main campus in Westlake, Texas. Schwab has long allowed RIAs it works with to provide loans against their clients’ securities. In 2023, it introduced what it calls its Pledged Asset Line, which enables loans to be arranged quickly online.
Schwab is now looking to extend the types of collateral for those loans to include certain types of alternative assets. Wurster said Thursday that every year at the firm’s annual Impact conference for RIAs he hears, “I’d love for you to do more lending to my clients, so I don’t need to introduce a bank.
“One of the things they ask for was to be able to lend against different forms of collateral,” Wurster said. “But we just rolled that out to a beginning group of RIAs, and we’ll roll it out all RIAs over time.”
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Only 23% of RIAs working with Schwab have arranged client loans
Schwab now works with more than 16,000 RIAs through its advisor services division, providing them with custodial support for safekeeping client assets, clearing services for trades and other types of support. Head of Wealth Advisory, Banking and Trust Services Neesha Hathi said Thursday that only 23% of the RIAs Schwab works with have arranged a Pledged Asset Line loan, or PAL, for their clients.
“That leaves a lot of opportunity for us to continue to engage the RIAs as well as help them educate more and more of their clients about the opportunity with a product like a PAL,” she said.
Schwab has started allowing RIA clients to take out loans against assets held in separately managed accounts, custom-built funds composed of individual securities. And while most loans Schwab arranges through RIAs still are backed by traditional investments like stocks, cash, certificates of deposit, mutual funds and bonds, Schwab is also beginning to allow alternatives as collateral.
Head of Schwab Advisory Services Jonathan Beatty said lending and other banking services also help RIAs play defense when other firms are trying to poach their clients.
“Because when institutions are trying to come into their relationship with low balances or, I’d say, low-rate loans, we can meet them in the moment and help them retain that client and avoid the disruption of a competitor coming in from an angle that they hadn’t been prepared for,” Beatty said.
Beatty noted that many of Schwab’s main competitors in providing custodial services have no internal banks. Above all, that’s true for Fidelity Investments, whose National Financial Services custodial division is Schwab’s main rival.
Schwab’s bank, meanwhile, had just over $253 billion in deposits at the end of the first quarter, making it one of the large banks in the U.S.
“We think we’re a differentiator there, because other custodians don’t have the robust capability that we have,” Beatty said. “So that’s why an advisor would pick Schwab over the other players in that scenario.”
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Using AI to work with investors with less than $1 million
Wurster separately laid out Schwab’s goals for artificial intelligence and other technological innovations. Among the planned uses are AI systems that will extend to more investors the offerings Schwab financial consultants now have for people with $1 million or more in household assets.
Like many wealth managers, Schwab sees its ability to bring in assets from new or existing clients as one of its key gauges of success. In the first quarter of this year, it brought $140 billion in net new assets, helping to boost its total for client assets to $12.6 trillion.
Wurster attributed these inflows in part to the “personalized relationships” clients have with the firm’s financial consultants, the firm’s name for its in-house advisors.
“But we’ve never served the $1 million or under client with a personalized relationship or haven’t in mass,” he said. “I believe with some of the AI capabilities that we’ll have … we’ll be able to provide insights to our clients with less than $1 million will provide similar levels of personalization over time.”
Schwab is often faced with questions about whether it favors its in-house financial consultants to the thousands of registered investment advisor firms that work with it through its advisor network. Wurster said he thinks the firm’s in-house services in the Schwab Wealth Advisory unit should remain the “go-to” for “investors that have been with us for a long time.
“In those cases, we want to be able to serve them with our proprietary wealth capabilities, in addition to all the managed investing strategies we have and our Schwab Advisor Network,” he said. “But we believe the go-to for existing Schwab retail clients should be our Schwab Wealth Advisory Program.”
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No plans for a cash-optimization system
Even as Schwab plans new uses for advanced technology, other firms’ adoption of AI for tax planning and other complicated tasks have put its stock under pressure in recent months. Shares in Schwab and other large wealth managers took a nose dive in February after the fintech firm Altruist added a tax feature to its Hazel AI system.
Concerns have likewise swirled around what AI could mean for firms’ lucrative business in managing clients’ cash. Using a process known as “cash sweeps,” firms will often take uninvested cash lying in clients’ accounts and move it over to affiliated or unaffiliated banks to be lent out. The resulting profits — made from the difference between the interest they collect on loans and what they pay on brokerage cash — can range into the billions.
Charles Schwab, for instance, made $3.17 billion in net revenue from interest payments in the fourth quarter of last year. A large part of that came from clients’ more than $450 billion clients in uninvested cash.
Industry analysts have warned AI could put those profits at risk by devising automated systems for making the best use of uninvested cash. Wurster said Thursday that he’s neither worried about that supposed threat nor interested in developing Schwab’s own cash-optimization system.
Wurster noted that cash optimizers are nothing new. Firms like MaxMyInterest have been around for more than a decade.
Schwab’s advantage, he said, is in making it easy for clients and advisors to decide on their own what they want to do with their cash.
“It’s a click of a button, a couple of clicks of a button, and you can purchase money funds with among the lowest fees in the industry and the highest yields,” he said. “You can buy individual bonds for a buck a bond, which I believe is the best deal in individual bonds in the world. You can find a deep and competitive [certificates of deposit] marketplace.”
Wurster said Schwab is not a bank that tries to “trap” clients’ money in a checking account.
“I can see why if you’re one of those banks, maybe you need to think about a cash optimizer, because it’s really hard to move your money around from checking to higher-yielding options.” Wurster said. “That is fundamentally not the case at Schwab. We couldn’t make it easier. We couldn’t promote cash options more.”
