What Schwab's fractional shares announcement means for advisers

The offering is intended to attract younger people to investing, but fractional shares could also help financial advisers

Oct 18, 2019 @ 2:34 pm

By Ryan W. Neal

Charles Schwab Corp. will soon let investors buy and sell fractions of equities on its digital brokerage, the Wall Street Journal reported Thursday.

As Schwab looks beyond no-fee trading, it feels fractional shares will further expand access to investing, especially for younger people. Investors could diversify portfolios with pieces of expensive stocks like Amazon or Berkshire Hathaway that they otherwise couldn't afford.

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The move would be a first by a major online brokerage, but companies like M1 Finance and Social Finance already offer fractional shares on their platforms. Custody and clearing firms like Apex Clearing and Folio Institutional also support fractional shares for human and digital financial advisers, and robo-advisers use fractional shares to offer portfolios with small minimums.

Schwab did not say when the program would launch or whether fractional shares would be incorporated into its digital advice platform, Schwab Intelligent Portfolios.

When asked whether Schwab was also planning on supporting fractional shares on its platform for advisers, a spokesman said the company is "always evaluating and working on new services to improve how people can invest, but we don't have anything specific to share on this right now."

Even though most financial advisers' clients are wealthy enough to own full shares of even the most expensive stocks in their portfolios, it is still a feature that some advisers would like to have.

At Folio Institutional, a custodian that supports trading in fractional shares for advisers and retail investors, CEO Greg Vigrass said fractional shares can be a tool for delivering high-value investment advice across any number of clients, regardless of account size, in an efficient and automated manner.

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With Folio, advisers can designate a dollar amount they would like to invest in a portfolio model, and the system will automatically make the allocations regardless of the price of underlying funds thanks to fractional shares. It can also account for investor preferences for environmental, social and governance-based investing, Mr. Vigrass said.

"Larger advisers love the ability to be precise," he said, adding that it can also help with tax optimization. "It's fantastic that others are recognizing the value."

Chris Chen, a financial planner with Insight Financial Strategists, gave an example of how traditional advisers can use fractional shares to put smaller accounts into a more complicated portfolio.

"If you have, say 20 ETFs in a portfolio, and an account that is relatively small, say less than $50K, or even $80K, you end up having a large amount of cash that cannot be invested using that portfolio," Mr. Chen said in an email.

"I'd like to know when TD is going to get on board with it! And I would love to see it on the adviser platform," he added. "It makes things so much easier for the adviser and the client when you can fully invest."

A spokeswoman for TD Ameritrade Institutional declined to comment on Schwab's offering fractional shares or whether TD is planning to offer the capability to advisers. BNY Mellon Pershing did not respond to a request for comment.

A Fidelity Institutional spokesperson said the company is "always exploring and testing various enhancements to our platform."

Robert Cortright, CEO of DriveWealth, a startup offering digital brokerage services for broker-dealers, advisers and digital investing platforms, said fractionalization can help investors who live paycheck to paycheck start investing.

"Somebody wanting to put $200 per week into a sophisticated portfolio that an adviser manages, this makes it possible to do that," Mr. Cortright said.

This makes it a great tool for independent advisers and financial institutions like Schwab connect with the next generation before they are wealthy or inherit assets from their parents.

Schwab just pushed the rest of the online brokerage industry to eliminate trading commissions, and fractional shares could be next.

"I think what Schwab is doing will permeate the industry," Mr. Cortright said.

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