Custodians curb long-short SMA strategies

Policy changes from custodians Schwab and Fidelity have advisors and asset managers rethinking strategies around long-short separately managed accounts (SMAs), which involves buying long equity positions while also selling short on underperforming stocks to offset capital gains for wealthy clients.

Amid surging demand for the tax-efficient strategy, in December 2025 Fidelity began blocking RIAs from opening and funding new long-short SMAs, and as of May 1 it instituted higher fees for some existing long-short SMA clients. Meanwhile, Charles Schwab recently put a 30 percent maximum limit on the portion of an RIA’s assets in its account that can be allocated to long-short strategies.

“The Fidelity pause was like an earthquake in the wealth management industry for people that were focused on a taxable practice, or taxable clients that had been using it over the last several years,” says Ehren Stanhope, chief investment strategist of Franklin Templeton’s custom indexing platform, Canvas. “I think that advisors, they’ve adapted well to that Fidelity pause, because Schwab fortunately had become available. Because previously, Schwab was not available for these long-short strategies at all.”

Canvas manages about $30 billion across long-only, long and short, ETFs, and managed options strategies, including its recently launched equity SMA for Josh Brown’s Ritholtz Wealth Management. Franklin Templeton has been providing taxaware longshort SMA strategies to advisors for less than a year. Its offerings range from 115/15 to 200/100, meaning portfolios that hold 115 percent to 200 percent in long positions and 15 percent to 100 percent in short positions while maintaining roughly 100 percent net market exposure.

Prior to Schwab and Fidelity − really Schwab − starting to curtail things, we were on track for offering a 250/150 as well, but they’ve sort of capped the leverage up to a 200/100,” says Stanhope. “And for some cases, some players [before custodian restrictions] were going as much as 300 percent long, 200 percent short. The more leverage that you have, the greater the ability to do loss harvesting.”

Invesco has been offering its longshort SMA strategies for roughly the last five years. The tax benefits to offset capital gains amid rising US equity markets has resulted in clients using a long-short SMA strategy at account sizes as low as $500,000, Invesco’s head of SMAs Eddie Bernhardt told InvestmentNews.

“It’s no longer just family offices and multifamily offices and sophisticated RIAs − we’re starting to hear incoming calls from wirehouse corner office teams, regional broker dealers, from middle market RIAs. And so the uptake here is accelerating very quickly. I’d guess it’s on the hundreds, if not thousands, of RIAs who are now looking at these strategies, if not utilizing them,” says Bernhardt.

Research from Invesco shows its custom equity 130/30 long-short SMA can produce more than 9 percent tax alpha in a year and between 2 and 4 percent tax alpha long term on a conservative basis.

The asset manager’s SMA platform totals around $39 billion in assets, while Invesco’s long-short custom equity SMA has grown nearly 300 percent over the last two years, even as inflows have slowed due to custodian restrictions.

“It’s slowed flows overall. We were accelerating at such a fast pace − the market seemed to have doubled in a year in size, which is remarkable,” says Bernhardt. “It’s also an opportunity for other custodians to potentially put a flag in the ground, though I’d say none has done it really effectively. Schwab and Fidelity have big service offerings and are built to serve the wealth management community.”

Falcon Wealth, a $6 billion RIA based in California, has about 70 percent of its client assets custodied with Fidelity and 30 percent with Schwab. Fidelity notified Falcon Wealth president Gabriel Shahin that it was increasing financing rates for long-short strategies from 60 basis points to 152 basis points, which is above the 40 to 120 basis point range (depending on client account size) that Shahin says Schwab charges Falcon Wealth for long-short SMAs.

“I’m more surprised with Schwab than I am with Fidelity. Because Fidelity is just saying I’m upping my fees by almost a percent, which is a lot on an investment that’s targeted to get 10 percent returns,” says Shahin, in reference to Schwab’s instituting a 30 percent limit on RIA assets being in long-short SMAs.

“All those long-short portfolios are 100 percent moving to Schwab from Fidelity,” Shahin says of his RIA. “These [long-short SMAs] are really good strategies. I would probably say 40 percent of our clients that did this are people who sold a business and need write-offs.”

Both Shahin and Andrew Herzog, an advisor with The Watchman Group RIA in Texas, say that the 30 percent limit passed by Schwab was a threshold they would never intend to reach for long-short allocation, even before that maximum was adopted.

“It is not for every client we have. It’s actually, for the vast majority, not appropriate. So we’re well below the 30 percent limit that Schwab just now rolled out,” says Herzog. “The best ones [for long-short SMA] are people who are going to be realizing a capital event − selling a business, for instance − or they have concentrated stock positions and they want to get out of it because they’re overly concentrated.”

Fidelity serves as a clearing and custodian company but not a bank, whereas Schwab is the 12th largest bank in the US by total assets. “Schwab probably had a little bit more control in saying, we will restrict it to 30 percent of AUM for each RIA − it was a little bit more their choice,” says Herzog. “Unlike Fidelity, who probably had to consult with their bank partner, and the bank just put a hard stop on it for now, or at least severely restricted it. That’s my understanding.”

Fidelity has offered access to third-party long-short SMAs since 2023 for third-party wealth management firms. Sources indicated to InvestmentNews that Fidelity is encouraging advisors to diversify long-short SMA providers and will support transfer steps amid the company’s ongoing pause on the opening and funding of new long-short SMA accounts.

“These decisions reflect Fidelity’s long-term approach to monitoring resources across the platform as we manage the growth of long/short SMAs,” a spokesperson for Fidelity told InvestmentNews.

“We are committed to long/short SMAs on Schwab’s platform,” said a Schwab spokesperson. “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.”

Hedge funds AQR and Quantinno are other active investment managers used by RIAs to gain access to long-short SMA strategies.

The asset managers reached by InvestmentNews agree that Schwab and Fidelity were justified in their long-short restriction reaction given the explosive growth of the strategy.

“I felt like it was hard for advisors, but responsible,” says Stanhope. “[Schwab] is just saying, we think that there’s an upper limit on the leverage that’s responsible, and we also don’t want an advisor coming to our custodian only for long-short strategies − hence that 30 percent cap. Because my sense is that custodians want the whole household; I’m sure that there’s greater profitability and efficiencies associated with that.”