Schwab raises fees on wealthy clients as upmarket push continues

Even as it takes steps to woo more high net worth clients, Charles Schwab is inching up its marginal fees for clients with between $5 million and $25 million in assets.

It's one of a slew of changes the megabrokerage has made this year that industry analysts believe signals Schwab's tilt toward competing more with RIAs while mitigating fears of revenue losses tied to advanced AI.

Schwab on Wednesday published a fee schedule showing increased rates for two groups of high net worth clients its internal advisors work with through its Schwab Wealth Advisory division. Starting on Jan. 1, Schwab will raise the marginal rate paid by clients with between $10 million and $25 million in assets to 0.45% from 0.3%. In a smaller change, the rate for clients with between $5 million and $10 million will go to 0.55% from 0.5%. 

Industry experts say the changes are likely aimed at plugging revenue leaks while doing little to lessen the threat Schwab poses to RIAs often fighting for the same investors. Tim Welsh, the founder of the consulting firm Nexus Strategies, said that even though the fees for high net worth clients are going up, they remain well below industry standards. Schwab, he said, is maintaining its position as a low-cost alternative for wealthy clients while also ensuring it makes a little more from managing their accounts.

"They're saying, 'Hey, we have some pricing power here because we have underpriced for so long that we should raise our rates,'" Welsh said. "But they're still cheaper than everybody else."

Even as the rates for high net worth clients go up, those for investors with $5 million or less will remain unchanged. The rate for clients with up to $1 million, for instance, will stay at 0.8%. Investors at the lower end of the scale also were required to pay a quarterly minimum, but that will be eliminated in the fourth quarter of this year.

READ MORE: Schwab imposes stricter limits on long-short accounts 

Schwab says most client accounts won't be affected

Schwab is making the changes as part of a move to pull its separately managed accounts — portfolios custom built for individual clients — into Schwab Wealth Advisory. Some of those accounts had formerly been managed under separate business lines with names like Managed Account Select, Managed Account Connection and Schwab Managed Portfolios.

Schwab said in a statement that the changes will affect the way "certain accounts are structured and priced to provide a more consistent and transparent experience." The new fees will apply only to clients who join Schwab Wealth Advisory on Oct. 1 or after.

"The majority of our existing clients will see no change in their overall fees, and in some cases, fees may decrease through asset aggregation," Schwab said. "Schwab will take special steps with respect to transitioning existing SWA clients to the new schedule to ensure that no clients see an increase of more than 5% at the billing group level."

Even as the rates for high net worth clients increase, Schwab is keeping its fees for clients with less than $5 million low. Clients with up to $1 million, for instance, are charged a fee equal to 0.8% of their assets, whereas the industry standard is closer to 1%.

Schwab's rates are "marginal," meaning they don't apply to all the money in a client's account. Clients who qualify for the lower fees in the $5 million-to-$10 million range pay a higher rate on assets below $5 million.

READ MORE: Schwab to use AI to offer wealth services to less-affluent customers 

Schwab's big plans for its wealth management unit

The new fees may not apply to many clients initially. But Schwab's ambitions for its wealth management business mean plenty of people are likely to one day pay the higher amounts.

Schwab CEO Rick Wurster has said that only 5% of the retail investors using Schwab's brokerage services pay for financial advice, but internal polling suggests as many as 31% are willing to do so.

"Our opportunity to close this gap is a win-win for clients and Schwab," he said in an earnings call in July. 

Many of those assets would presumably be managed within the Schwab Wealth Advisory division, an RIA within Schwab that had just over $218 billion in client assets by the end of December. Schwab recently signalled its ambitions for its internal wealth management business by taking out an advertisement in the Wall Street Journal saying it was planning to add thousands of financial consultants to its current stable of roughly 3,000.

Schwab has sought to characterize the growth plans as posing no threat to outside RIAs that use it as a custodian to safeguard client assets and provide other services. Wurster has noted that there is $37 trillion in retail wealth to be managed in the U.S., implying there is more than enough for everyone to share.

READ MORE: Could Altruist deal turn Vanguard into 'the next Schwab'? 

Schwab's tilt toward high net worth clients

Besides its in-house advisors, Schwab can send clients looking for advice to firms that are part of its Schwab Advisor Network, which is made up of roughly 150 large RIAs that have agreed to pay Schwab fees in return for warm client leads. Recent changes to Schwab's referral rules are also aimed at keeping more wealthy clients in house for advice and farming fewer out to network RIAs.

Last month, Schwab announced plans to raise the asset minimum determining which clients can be referred to outside RIAs from $2 million to $5 million starting on Jan. 5. That change comes after the asset floor was raised from $500,000 at the start of the year.

Welsh, who was at Schwab from 1999 to 2006, said those changes and this week's fee hikes aren't "competing with RIAs on price" but rather "narrowing what Schwab hands off to RIAs while pricing up what it keeps."

Charles Schwab has long been known as a discount brokerage that helped bring investing to the masses. But it has been moving steadily upmarket in recent years, said Mike Papedis, the founder and CEO of the RIA consultant Fusion Financial Partners. He said Schwab has clearly marked its interest in working with high net worth clients. 

Steps in that direction include its purchase in November of Forge, a firm that helps investors gain access to private equity, private credit and other alternative investments, and additions of its family-office services for ultrawealthy families.

"I think they're putting a stake in the ground that they want to compete for the ultrahigh net worth clientele," Papedis said.

READ MORE: Schwab is changing — what it means for RIAs in its referral network 

Schwab may be looking to plug revenue holes

William Trout, the director of securities and investments at Datos Insights, said Schwab's latest fee changes on advisory accounts is likely an attempt to offset some of its dwindling revenue sources. Like many large brokerages, Schwab makes billions of dollars from taking clients' uninvested cash, moving it over to banks and then pocketing the difference between what it makes in interest and what it pays investors. 

That lucrative income source has been under threat lately in part from fears that AI-driven cash sorters could eventually be relied on to automatically find better uses for clients' money.

Trout noted that Schwab also plans to charge new fees for Schwab Wealth Advisory accounts not managed through its affiliate Charles Schwab Investment Management but by an outside asset manager. Also starting on Jan. 1, clients will have to pay a 0.35% fee on equities in separately managed accounts held by third-party managers, 0.15% on bonds and other fixed-income securities, and 0.1% on municipal bond ladders.

Taken together, Trout said, the fee changes seem aimed less at competing with RIAs 

"and more consistent with margin defense on the advisory book as cash revenue stays under pressure.

"The strategic question is whether fee increases at the high end will accelerate the client attrition they're designed to offset," he added.