Schwab Earnings Boosted by Latest Tax-Focused Strategy

So, here’s the long and short of it …

It wasn’t just a massive boost in trading volume during the SpaceX initial public offering that fueled Charles Schwab’s second-quarter earnings growth. Long-short strategies — which, unlike traditional direct indexing, aim to generate harvestable losses across all market environments — have been a staple for advisors guiding high-net-worth clients through hefty capital gains tax hits. The strategies are delivering a noticeable boost, with the discount brokerage posting a 21% year-over-year revenue increase overall in the second quarter, outperforming Wall Street expectations. Executives pointed to sustained interest in long-short tax-managed strategies as an underlying engine. 

“Bigger competitors were maybe not making this as available, which probably led to a little bit of a surge,” CEO Rick Wurster said during the company’s earnings call this week. “We’re past that [surge] now and in more of a stable growth environment.” 

King Harvest

CFO Mike Verdeschi also noted that while the offering represents a modest slice of Schwab’s overall business, roughly 1% of firm revenue, it remains a focus. “It’s grown very quickly,” he said during the call. Here’s how they work: Long-short strategies pair long positions in individual stocks expected to rise with short positions in those expected to fall:

• By realizing losses on either side of the portfolio, managers can offset outside capital gains even in bull market runs. 
• Advisors typically use this blueprint for high-net-worth clients facing major tax triggers, such as selling a business or unwinding a concentrated stock position.

“Being able to generate and harvest losses … while still largely tracking an index is quite a powerful strategy,” Wurster said, predicting the approach will only gain traction over the next decade.

Not Too Much. Despite growing advisor momentum, long-short strategies carry inherent complexity. They require active portfolio oversight, higher trading volume and borrowing fees for short positions. Shorting equities also carries unique risks: While losses on a long position are capped at the principal invested, theoretical losses on a short position are unlimited.

Mindful of those risks, Schwab instituted guardrails earlier this year on how much advisors can allocate to long-short separately managed accounts, capping allocations at 30% of a practice’s total assets held at the firm.