Schwab creates new limits to RIAs using long-short, separately managed accounts

The Charles Schwab Corp. this week told to its registered investment advisor clients it was placing new limits on long-short separately managed accounts, a strategy that has grown in popularity, according to a report Thursday afternoon from Bloomberg. 

The proportion of an RIA’s assets at Schwab that can be held at the long-short separately managed accounts, or SMAs, can no longer exceed 30% according to the report.

Charles Schwab is the leading custodian of RIAs in the financial advice industry, with more than $5 trillion of advisors’ assets held.

Schwab’s move follows a change at Fidelity, another leading custodian for RIAs, according to Bloomberg. Fidelity recently stopped opening such long-short accounts as tax-aware strategies have become more popular, according to the report.

Long-short investment strategies have been around for decades but were pitched to financial advisors through mutual funds or exchange-traded funds. The strategy aims to produce capital losses by both betting long, looking for gains in stock positions, and short, looking for losses.

Leverage is key for clients, and helps them tally losses more efficiently, according to Bloomberg. But it also raises balance sheet risk for the custodians, which are likely looking to dial back risks at the moment.

"We are committed to Long/Short SMAs on Schwab's platform," said Schwab, in a statement provided to InvestmentNews. "The changes we have recently shared with our participating RIA clients are designed to ensure Long/Short SMAs on Schwab's platform grow responsibly over the long term. Schwab has the scale, the balance sheet, and the expertise to support this offer and will continue to meet the needs of RIAs and their clients."