Schwab platform gives advisers easier access to alternative investments

iCapital Network is first sponsor to join the Schwab alternatives marketplace

Oct 24, 2019 @ 2:34 pm

By Ryan W. Neal

Schwab Advisor Services has a new platform to provide independent registered investment advisers easier access to alternative investments.

The Alternative Investment Marketplace features third-party sponsors offering a menu of private equity, hedge funds and real estate. In addition to improving access to alternative funds, Schwab's platform removes custodial fees on alternative assets and streamlines processing of capital calls.

[More: Legislation re-introduced in House to expand pool of accredited investors]

The first sponsor on the platform is iCapital Network, a company that provides technology and due diligence around alternative investments. iCapital also powers alternatives platforms at JPMorgan Chase, United Capital and Fidelity Investments.

[More: Bank of America to sell alternative operations with $20 billion to iCapital]

iCapital pre-qualifies clients and provides research and data on the funds. Using technology to aggregate assets across multiple investors, iCapital lowers the minimum investment for alternatives to $100,000.

Advisers can manage iCapital investments within clients' Schwab accounts. The Alternative Investment Marketplace also provides reporting and electronic access to documents associated with the investments.

The goal is to make investing in alternatives as easy as investing in a mutual fund, said iCapital CEO Lawrence Calcano.

"Operationally, [alternatives] are more complex than just buying a stock," Mr. Calcano said. "This kind of partnership is incredibly helpful in reducing and removing friction that we have."

This friction, as well as high minimums, have prevented many advisers from offering alternatives to clients, he added.

Matt Brown, CEO and founder of CAIS, another platform for alternatives that is in talks to join Schwab's marketplace, estimates that only 1% to 3% of assets in the independent adviser channel are allocated to alternatives. While RIAs are using alternatives than ever before, there is still "tremendous room to grow," he said.

[More: Digital marketplaces aim to ease RIA access to alternative investments]

"I think there is a demand for return and improved outcomes, and I think certain traditional assets and strategies … are just not delivering," Mr Brown said. "Alternative investments for a long, long time have been, to a degree, either misunderstood or a little bit cumbersome to allocate to, but they've delivered returns."

CAIS and iCapital both make funds available to Fidelity's Alternative Investments Network, which the custodian has offered advisers since 2013.

But Schwab has been more conservative when it comes to assets going to alternative investments.

In 2009, Schwab made a blanket decision to stop accepting custody of alternative investments, but it reversed the decision a year later. Since then, the company has used the Deposit Trust and Clearing Corp.'s Alternative Investment Product service to provide custody services and reporting for alternatives. The firm also provides some access to alternatives on its OneSource platform.

Even though alternatives are riskier, platforms like CAIS and iCapital bring deep expertise and due diligence to help mitigate those risks for advisers, said Jalina Kerr, Schwab Advisor Services' senior vice president of client experience. Schwab has learned over the years how to appropriately review vendors and ensure the right controls are in place.

"I think our understanding of some of these platform providers and what they bring to the table has continued to grow," Ms. Kerr said.

Ultimately, the decision to launch an alternatives marketplace came from adviser demand, she said. Schwab has seen double-digit growth in assets allocated to alternatives as advisers look for ways to differentiate themselves.

"Many of them consider alternative investments to be a value proposition that they are leveraging," Ms. Kerr said.

But can making these investments easier to access also increase the likelihood of them being misused? Mr. Kerr acknowledged that alternatives aren't suitable for every client portfolio, but the responsibility comes down to the adviser.

"Advisers have to make the right call in terms of their fiduciary interest for their clients," she said.

Mr. Brown called Schwab's Alternative Investment Marketplace a significant, positive change for alternatives.

"Schwab is saying we're going to step up and help make transactions smoother, better and more cost-effective," he said. "It's a real validation, I think, that alternative investments broadly are becoming more widely used by financial advisers."


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