As AI threatens to squeeze firms' profits on uninvested cash, RIAs that work with Charles Schwab are gaining a new option for clients' long-term cash holdings.
The fintech firm Save announced Thursday that more than 16,000 RIAs using Schwab for asset custody and support can now access its high-yielding cash management service. Save's offering, called Market Savings, is designed to strike a balance between the liquidity that comes from holding wealth in cash and the returns from putting it in higher-yielding investments.
To do that, it allows advisors to move clients' uninvested cash over to various banks, where it generates interest. Market Savings then takes those yields and invests them in vehicles linked to exchange-traded funds that track stock indexes like the S&P 500 and Nasdaq or markets for gold and other commodities.
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Giving investors a 'halfway' between short-term cash and equity returns
Over the past three years, Market Savings has averaged an annual return of 7.5% — far less than what investors could have gotten by investing in the stock market.
But equities come with more risk. With Market Savings, investors' principal remains untouched and can provide a source of cash ready to be drawn on whenever needed.
"And at the end of the day, the maximum loss to clients, whatever happens, is they wouldn't get any interest," said Sean O'Hara, a director at Pacer Financial, which owns a stake in Save's parent company.
"It's sort of halfway between short-term cash and what you might make in the equity markets," added O'Hara, who is also president of Pacer Financial's PacerETFs Distributors subsidiary.
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AI anxieties swirl around firms' cash profits
Concerns about wealth managers' often lucrative business handling clients' uninvested cash have come to the fore in recent months. Schwab, LPL Financial and many of their rivals are contending with fears that AI systems could one day
Shares in Schwab and LPL were down by 6% and 7%, respectively, on Tuesday this week following Meta Platforms' release of an AI agent named Muse seemingly capable of performing various complicated tasks with minimal prompting from users. One such task could be to scan options for investing cash and automatically move users' money into the highest-yielding ones.
O'Hara said Market Savings is in no way meant to compete with Charles Schwab's current options for investing client cash.
Like many broker-dealers, Schwab lets investors and the advisors move cash into money market funds or bonds, often offering higher returns than standard savings accounts. It also has a bank where investors can invest products like certificates of deposit and earn even higher yields in return for locking their money up for longer.
O'Hara said Market Savings will be offered to RIAs that use Schwab's custodial and other services through what's known as Schwab Marketplace, a forum for putting clients in investment accounts managed by outside firms. Advisors will share with Schwab part of the fees they receive for managing cash invested in Market Savings.
O'Hara expects the program to have strong appeal for advisors.
"Normally the way it works is they've got to take care of cash, but they don't have any way to sort of get paid on that," he said. "So they're doing a lot of work around cash, but they're not getting any revenue."
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Keeping cash in Schwab's ecosystem, even if it's not in cash sweeps
Tim Welsh, the founder of the consulting firm Nexus Strategies, said the obvious benefit of an offering like Market Savings is that it allows Schwab to retain a relationship with cash that might otherwise go elsewhere. Since it will only be on offer mostly to wealthy clients — the minimum investment is $100,000 — Welsh said he doubts it will take a bite out of margin profits Schwab makes in other ways.
"This is a sophisticated, complex and niche product," he said. "I don't think it will materially impact their dependence on net interest income."
Like many broker-dealers, Schwab makes a good deal of interest revenue from something called
Cash sweeps mean big business for Schwab and other broker-dealers. Schwab, for instance, made nearly $3.4 billion in net interest revenue in its latest quarter, much of it on nearly $485.7 billion held in sweeps accounts.
O'Hara said he views sweeps accounts as a place where clients can hold their money for the short term before deciding how to invest it. He said he views Market Savings as an option for high net worth clients and others who want to hold cash for the long term while making a higher return than they could otherwise.
"This was a bit of a struggle to get it on Schwab's platform," O'Hara said. "They were worried it would disintermediate, if you will, their sweep business. But I don't think that the sweep money is appropriate for this. This is not transactional cash. It's permanent cash."
Schwab did not respond to requests for comment.
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Cash can sit idle for years, often generating very little
O'Hara said he's looking to strike similar deals allowing advisors affiliated with other firms to offer Market Savings to their clients. There's certainly no shortage of cash to manage.
Estimates of how much U.S. households have in cash savings run into the trillions.
"What's really interesting is
O'Hara said the Market Savings offering isn't entirely new to the investing world. In many ways, it's a "twist" on investment vehicles like index-linked certificates of deposit and indexed annuities that similarly offer steady returns with little risk. One key difference is Market Savings makes monthly investments of interest. Whatever returns are made are rolled back into the principal and used to generate interest for new investments.
By spreading cash invested in Market Savings across various banks, Save can get FDIC coverage for up to $50 million, O'Hara said. With its $100,000 investment minimum, O'Hara said Market Savings certainly won't be for everyone.
"But, you know, that wealthy to ultrawealthy client or, I think, family offices are certainly a target," he said. "Corporations are also a great target. We actually get great interest from corporate accounts because all operating businesses keep some form of a cash reserve."
