Schwab to Launch Tax-Aware Long/Short Strategy as Assets in the Category Surge

CNBC reported that the plan emerged as Schwab disclosed that margin loan balances rose 14% quarter over quarter to $187.9 billion, including $60.7 billion tied to tax-aware long/short strategies used by many registered investment advisors. Assets in the strategies, known as TALS, have surged to more than $170 billion this year from $2 billion in 2022, according to an estimate Tax Alpha Insider provided to CNBC in September.

UBS analyst Mike Brown asked Wurster whether Schwab saw an opportunity to launch a proprietary solution, noting that tax-advantaged long/short products have been a meaningful driver of client demand and asset gathering across the industry and that more funds are coming to market. Wurster said he expects Schwab to have an offering. He pointed to the firm's existing direct indexing capability, which he said has delivered strong tax alpha for clients, and said he expects Schwab to deliver an extended version of that capability on long/short. He described the move as another way to generate revenue but more importantly as a way to offer sustainable long/short strategies that are operationally and financially manageable over the longer term.

Years of stock market gains have left wealthy investors looking for more ways to shield capital gains from taxes, CNBC reported. The same dynamic applies to business owners cashing out, executives with large stock compensation packages and employees at companies that have gone public in recent years. For brokers and investment advisers, the products offer relatively high fees and can attract new wealthy clients.

Standard tax-loss harvesting is already used in direct indexing accounts on platforms including Schwab to pair stock gains and losses in a tax-efficient way. But advisers say it becomes harder over time because the market tends to rise and most positions in a diversified portfolio eventually rise far enough above their cost basis that later downturns do not produce taxable losses, according to an overview of TALS from adviser research platform Kitces. For positions that keep declining, only a finite amount of losses can be generated because market value and cost basis can only fall to zero.

Tax-aware long-short strategies work around that limit by adding leverage on both the long and short sides of an existing portfolio. The investor buys more positions and increases the number of potential losses to harvest. Kitces said the approach can keep a portfolio economically neutral. Because short positions can theoretically generate an infinite amount of losses as they decline when markets rise, TALS portfolios are less likely than standard long-only portfolios to run out of losses to harvest, according to Kitces.

Brent Sullivan of Tax Alpha Insider wrote in a post on X on Thursday that advisers will have many questions about the Schwab products. He said the products should not be called funds, a term UBS analyst Brown used in his question. Sullivan wrote that it is reasonable to speculate a Schwab product could meaningfully lower the assets-under-management minimum typical on these products, but he said it remains an open question whether the products will be available only to Schwab advisers and only on Schwab's platform.

Wurster provided few details and no timeline for a launch. He said Schwab is working on it and will give more updates on future calls about when it may launch.

The government has been taking a more aggressive stance on tax-avoidance strategies and some, though not all, tax alpha strategies used by the wealthy. Treasury Secretary Scott Bessent and the IRS recently issued a notice over the use of sophisticated ETF strategies to shield capital gains from taxation, and the notice also expressed interest in tax-aware strategies, CNBC reported.