Fintech company Save said more than 16,000 independent registered investment advisers (RIAs) using Charles Schwab’s custody and support services can now offer clients its Market Savings cash-management product. The offering is designed to balance liquidity with the potential for higher returns, giving long-term idle cash an alternative to conventional cash accounts.
How Market Savings works
Advisers can direct clients’ uninvested cash to multiple banks, which pay interest on the deposits. Save then invests that interest in investment instruments linked to exchange-traded funds (ETFs) tracking the S&P 500, the Nasdaq and commodities such as gold.
Save said Market Savings generated an average annual return of 7.5% over the past three years. That was below the potential return from investing directly in equities over the same period, but the product is structured so that the principal is not invested in those markets and remains available for withdrawal when needed.
Sean O’Hara, a director at Pacer Financial and president of its PacerETFs Distributors subsidiary, said that in the worst-case scenario, clients could lose the interest rather than their principal. He described the product as occupying a position between short-term cash and equity-market returns.
Market Savings requires a minimum investment of $100,000, putting it primarily within reach of high-net-worth and ultra-high-net-worth clients, family offices and corporate accounts. O’Hara said businesses typically maintain operating cash reserves, which has also generated interest among corporate users.
AI puts cash revenue back in focus
The way wealth managers earn interest income from clients’ idle cash has come under renewed scrutiny. The concern is that artificial-intelligence systems could eventually compare cash-investment options automatically and move funds to higher-yielding products, putting pressure on the cash spreads earned by brokerages and wealth managers.
On Tuesday, Meta Platforms introduced an artificial-intelligence agent called Muse. Schwab and LPL Financial shares fell about 6% and 7%, respectively, that day. Muse was described as capable of completing complex tasks with limited human prompting. One potential application would be scanning cash-investment products and automatically moving funds to the option offering the highest yield.
O’Hara stressed that Market Savings is not intended to replace Schwab’s existing cash-investment arrangements. Schwab allows investors and advisers to allocate cash to money-market funds or bonds, and offers products such as certificates of deposit through its banking operations. Those products generally require clients to lock up funds for longer periods in exchange for higher yields.
Schwab Marketplace distribution
Market Savings will be offered through Schwab Marketplace to RIAs using Schwab’s custody and other services. The platform allows advisers to allocate client assets to investment accounts managed by outside firms. Fees earned by advisers from managing Market Savings will be shared with Schwab.
O’Hara said advisers have historically been responsible for handling client cash without having a corresponding source of revenue. Market Savings could give them a way to earn fees from managing cash intended to remain invested for the long term.
Tim Welsh, founder of Nexus Strategies, said a direct benefit of products like Market Savings is that Schwab can maintain its connection to clients’ cash rather than allowing those assets to move to another platform. Because the product has a $100,000 minimum, Welsh said he does not expect it to materially weaken Schwab’s profits from net interest income. Schwab did not comment on the matter.
A different role from cash sweeps
Cash-sweep programs are a significant source of revenue for Schwab and other brokerages. Under these arrangements, clients’ uninvested cash is generally transferred to banks, which lend the funds at relatively higher rates. Clients receive a small portion of the interest, while the brokerage retains the remainder.
Schwab’s latest quarterly net interest revenue was close to $3.4 billion. A substantial share came from cash-sweep balances of about $485.7 billion. O’Hara said sweep programs are better suited to transactional cash that clients plan to hold briefly while deciding what to do next, whereas Market Savings is aimed at “permanent cash” that clients expect to hold for the long term.
He said Save faced concerns when bringing Market Savings to Schwab’s platform because the product could divert assets from the cash-sweep business. In his view, however, the two products serve different purposes. Schwab did not respond to the issue.
Why idle cash can stay untouched for years
O’Hara said Save is discussing similar arrangements with other financial institutions. U.S. households hold cash savings worth trillions of dollars, but the duration of that cash inactivity may be as important as the total balance. Many clients do not spend or invest the money quickly; it can remain in their accounts for years.
O’Hara described Market Savings as a variation on index-linked certificates of deposit and index-linked annuities. Such products generally seek to provide relatively stable returns with lower risk. Market Savings differs in that it invests the interest monthly, adds the resulting return back to principal, and uses that balance for subsequent investment and further accumulation of interest.
O’Hara said that by distributing funds among multiple banks, Save can expand Federal Deposit Insurance Corporation coverage to as much as $50 million. The $100,000 minimum investment nevertheless limits the product’s availability. For wealthy clients, family offices and businesses maintaining operating reserves, the cash balance, intended holding period and ability to withdraw funds remain central considerations.