Introduction to Schwab Alternative Investment Custody Services

Introduction to Schwab Alternative Investment Custody Services

Schwab's Alternative Investment Custody Services allows you to custody compatible alternative investments at Schwab and manage these investments alongside the rest of your traditional assets. Alternative Investment Custody Services offers the benefits of the Alternative Investment Products (AIP) platform Tooltip , which improves alternative investment access, valuation, and transparency.

Key information related to Alternative Investment Custody Services:

  • Consolidates all client assets in one account.
  • Enables display on client statements and in daily download.
  • Allows easier billing of management fees.
  • Streamlines purchase procedures with a specialized team to assist with the purchase of eligible alternative investment assets from beginning to end.
  • Team to reconcile positions and perform registration updates and pricing updates.
  • Support from a highly dedicated team of specialists with extensive knowledge of products and procedures.
  • No advisor may hold more than a 40% concentration of alternative investment assets as part of his/her total account assets at Schwab (excludes Schwab Alternative Investment OneSource® funds).
  • No fee to set up a position or to process a transaction; competitive annual custody fee (see the FAQ module for more information).
  • Subscription materials for all investments must reflect the correct registration for Schwab to comply with Securities and Exchange Commission requirements.
  • For IRA accounts (qualified accounts): "Charles Schwab & Co., Inc. as custodian for [client name] IRA, Schwab Tax Identification Number 94-1737782."
  • For all other accounts: "Charles Schwab & Co., Inc. FBO [client name], Client/Investor Tax Identification Number (TIN)."

For information regarding features and details of holding alternative investments in custody at Schwab, refer to the information below.

Annual review process

Schwab performs an annual review of each alternative investment held in custody to determine whether it is eligible for continued custody at Schwab. Schwab contacts issuers directly to review alternative investment(s) on an annual basis to ensure that the securities are still operationally compatible. You do not have to take any action as long as the security remains compatible; however, it is your responsibility to continue to perform ongoing due diligence, monitoring, and review of the alternative investment(s). We will contact you to discuss next steps if the alternative investment no longer meets our criteria.

See Introduction to alerts for alerts you will receive related to the annual maintenance and continued custody of alternative investments.

Schwab Charitable™

Private investments (aka alternative investments) held in Schwab Charitable donor-advised fund accounts are subject to the following provisions:

  • A Schwab Charitable account must have an asset balance of at least $10 million for you to recommend a private investment. All private investment purchases are subject to due diligence review and must be pre-approved by Schwab Charitable.
  • Unlike traditional assets held in a Schwab Charitable account, private investments are held at third-party custodians. Therefore, these assets will not appear on the Schwab statement.
  • The purchase of privately held real estate investment trusts (REITs) is prohibited, unless used solely for the purpose of blocking unrelated business taxable income in a private equity fund.

For a full list of the criteria for private investments in Schwab Charitable accounts, review the Investment Advisory Agreement and the Investment Policy Statement.

Alternate custodians

You may choose any custodian of your choice. However, Schwab has established a relationship with Millennium Trust Company as an alternate custodian for:

  • Alternative investment purchases or positions that Schwab cannot custody
  • Those that advisors would prefer to custody elsewhere
  • Alternative investment purchases that need to be completed in a time frame that Schwab cannot meet because of urgency

Millennium Trust Company has agreed to standard service levels and to monitor service to ensure high standards are maintained. See the dedicated Millennium website for Schwab for more information.

Operationally incompatible alternative investment assets

Securities for which Schwab cannot maintain good possession or control must be removed from customer accounts to comply with Securities and Exchange Commission (SEC) customer protection Rule 15c3-3.

Alternative investment assets are deemed operationally incompatible if Schwab cannot obtain required documentation from the issuer of the security, if the issuer fails to honor the terms of the issuer agreement, if Schwab discovers an operational impairment with the security, or if the security has undergone a corporate action that makes it incompatible.

All operationally incompatible securities must be removed from custody at Schwab. There are no exceptions. When an alternative investment is reported as operationally incompatible you have 30 days to resolve the issue before the end-client is notified. Most of these securities are active and eligible for transfer to an alternate custodian.

The process for exiting incompatible alternative investment assets is separate from the alternative investment Annual Review Process.

Valuation policy

As a retirement account custodian, Schwab is required to report fair market value (FMV) to the IRS annually by June 1. FMV is the standard for valuation used by the IRS for tax reporting. To ensure Schwab has updated FMV of alternative investments held within all IRAs, Schwab contacts alternative investment issuers to refresh stale or N/A pricing. Schwab relies on the issuer of alternative investments to provide the values of these securities directly to Schwab, or indirectly through the SEC filing process (depending on asset class). Schwab obtains values from the issuer, other third parties, independent appraisals, etc. As Schwab receives these FMV updates, the client's statement value is updated. See important information for clients to know about alternative investment valuation for IRAs.

Schwab performs a reasonableness check of the issuer provided FMV. Our check considers variance as well as other factors.

Alternative investments held in custody at Schwab must be submitted for Asset Acceptance Review (AAR) to determine whether the security is operationally compatible with our custody service. All alternative investments must pass an AAR before Schwab can take custody.

Reviews can take one to two weeks. Investment advisors (IAs) should submit AAR requests as soon as possible, and at least one to two weeks before their subscription date. The Alternative Investment Asset Acceptance team collects and prioritizes AAR requests, striving to process them in the order submitted, but considering those requests with the nearest purchase deadlines.

Note: The AAR is not deciding if the asset is a good investment or whether the investment is suitable for the investor.

If an alternative investment was previously submitted through AAR and the security has been accepted for custody, the advisor can proceed with submitting the Alternative Investment Letter of Authorization form for a purchase or transfer into Schwab.

AAR for AIP members

Schwab offers a simplified process for investing in AIP member securities.

AIP member securities that meet Schwab's servicing requirements are handled through a unique Asset Acceptance process with simplified document requirements. Advisors purchasing securities from AIP members that meet Schwab's AIP custody requirements do not need to submit an Asset Review Request Form and can initiate a purchase with the Alternative Investment Letter of Authorization.

This simplified process includes:

  • No Asset Review Request Form required for review (there is no need for advisors to submit a full set of offering materials and audited financials) 
  • No required Issuer Profile Form 
  • No manual delivery of data to Schwab from issuers (required information can be transmitted via AIP) 
  • A 48-hour service-level agreement for purchases in AIP member securities 
  • Purchases and capital calls utilize the Alternative Investment Letter of Authorization (and associated documentation)

AAR for all other alternative investments

Investments in non-AIP member securities follow the AAR process outlined below and can take one to two weeks.

  • AAR applies to all initial and subsequent investments and to transfer requests not previously reviewed. 
  • For private offered investment pools, the pool’s manager or advisor must be registered with the SEC, State, Exempt Reporting Advisor (ERA), or the CFTC.
  • Although some investments have additional requirements, in general you will need to provide:
    • Audit by PCAOB member auditor
    • Prospectus or private placement memorandum
    • Schwab Asset Review Request Form for the appropriate investment type

For the initial investment, capital calls, and subsequent investments, you will also need an Alternative Investment Letter of Authorization for each transaction.

* Overall completion times may exceed two weeks.
** If the security is in its first 12 to 16 months of operation and no audited financials are yet available, submit a copy of an Engagement Letter or Letter of Engaged Services between the issuer and PCAOB member auditing firm.

Schwab offers custody services for many alternative investments. Schwab accepts the following investment types, subject to our Asset Acceptance Review process, for custody:

Investments we accept

Hedge funds, hedge fund of funds, private equity funds, or other privately offered pools

  • Domestic unregistered funds (LPs, LLCs, etc.)
  • Offshore funds
  • Privately offered real estate pools 

Registered entities

  • Domestic registered funds (1940 Act)
  • Registered LPs and REITs (1933 Act)

Private equities

  • Securities of federally regulated financial institutions (banks, etc.)
  • Equity owned by a current or past employee, board member, or control personnel of the issuing entity
  • Securities underwritten by acceptable broker-dealers
Investments we do not accept

The following are incompatible with Schwab Alternative Investment Custody Services:

  • Direct investments in real property.
  • Alternative investments pledged to secure other obligations.
  • Securities that require in-kind contributions or distributions.
    • Schwab can service only cash subscriptions and redemptions.
  • Promissory notes and other privately issued debt instruments.
  • Church bonds.
  • Investments in cannabis and cannabis-related activities.
  • Digital assets and offerings of digital assets.
  • Private investment in public equity, or investments in operating companies that do not meet the private stock custody criteria, including investments in cannabis, investments in digital assets and securities violating any law. 

For your convenience and to ensure seamless service for your clients, we have established relationships with an alternate custodian for those investments we cannot custody.

What security types are considered alternative investments?
Alternative investments are generally defined as non-traded assets, which can include private stock, hedge funds and other privately offered pooled investment vehicles, private debt, real estate investment trusts, and certain publicly registered entities. See the Asset Eligibility module for more information.

How can I determine if an alternative investment has been previously reviewed at Schwab?
Schwab is constantly reviewing new alternative investments through the Asset Acceptance process. Contact your service team with the full investment name to determine if a security was previously reviewed and accepted for custody at Schwab. If no review was performed, submit the Asset Review Request Form (with associated documents) so the security can go through the Asset Acceptance process.

Is there a limit to the amount of alternative investments that can be held in an account at Schwab?
Yes. No advisor can hold more than a 40% concentration of alternative investments as part of his/her total account assets at Schwab, not including Schwab Alternative Investment OneSource funds.

What are the fees Schwab charges to custody alternative investments?
Because of the additional work related to the maintenance of alternative investments, Schwab charges an annual custody fee to maintain the position:

  • Position setup fee—No fee
  • Transaction fee—No fee
  • Annual custody fee—$250 annual fee per position; $500 maximum per account
  • Wire fee—$25

The annual fee is billed on the first business day in October each year in arrears. Your firm receives an alert approximately six weeks before that date to remind you of the upcoming fee.

For positions not held for a full year, the annual custody fee is prorated based on the number of full calendar quarters the position is held at Schwab. If you wish to designate a brokerage account as the billing account for an IRA or other account type, submit the Alternative Investment Billing Account Designation Form to your service team.

Does Schwab report alternative investment positions on client statements?
Yes. Schwab reports alternative investment positions held in custody at Schwab.

What will happen if Schwab receives an incoming transfer that includes alternative investments?
We strongly recommend you submit your alternative investments for review prior to attempting to transfer a client's assets, to avoid a rejection of the transfer. If the incoming transfer has an alternative investment that has not been accepted via the Asset Acceptance Review, Asset Transfer Services will reject the full transfer up front. To accomplish a full transfer, the client must remove the alternative investment from the account at the other transferring firm or liquidate it before resubmitting the full transfer of asset request. The client may also complete new paperwork for a partial account transfer.

Why does Schwab offer pending settlement placeholders Tooltip on purchases through Schwab Alternative Investment OneSource but not on purchases through Schwab Alternative Investment Custody Services?
Schwab does not treat a purchase on the Schwab Alternative Investment Custody Services platform as a trade and therefore cannot offer pending settlement placeholders. For Schwab Alternative Investment Custody Services purchases, Schwab does not execute trades as broker of record, and confirmations are issued by the Fund directly to the client.

In comparison, for purchases on the Schwab Alternative Investment OneSource platform, Schwab executes trades as broker of record. Confirmations are issued by Schwab.

How do I initiate a liquidation/redemption/repurchase of shares for an alternative investment?
Contact the issuer to obtain their required paperwork. Submit the completed issuer paperwork to your service team for processing. Schwab will provide any required stamps and forward the request to the issuer. Proceeds will be returned to Schwab and credited to the end-client account.

Does Schwab accommodate accredited investor status verification requests?
No. Schwab does not provide such verification because we lack sufficient information to verify a client's net worth or income. Schwab will offer to provide account statements dated within the prior three months.

Why may Schwab's Asset Acceptance Review take longer than some other custodians?
There are different standards in place for asset acceptance at each custodian. Another custodian may be a bank trust company; therefore, it does not have the same asset acceptance rules. Schwab, as a broker-dealer, engages in a comprehensive review process that is intended to ensure a security's operational compatibility.

If it is determined that Schwab can no longer hold an asset, what is the time frame in which I must move that asset?
Schwab will provide reasonable time frames and have an execution plan intended to minimize any disruptions for your firm.

When are alternate custodians an appropriate solution for me?
They can be an option for you when the security does not pass our Asset Acceptance Review process, or the transaction deadline is sooner than the one to two weeks required for the review process. You have the option to take these assets to any other custodian you may select.

Will alternative investment assets held at Millennium Trust Company show on Schwab statements?
Alternative investment assets held at Millennium Trust Company are not on Schwab's statements. If an asset is held in custody at Schwab, it will appear on Schwab's statements, but if the asset is held at Millennium Trust, the client will receive a printed statement from that custodian.

Will I be able to download Millennium Trust Company account information into my portfolio management software?
Yes. You can request that Millennium Trust Company include your clients' alternative investment position data in your Schwab Data Delivery® and SchwabLink® downloads. To initiate this, you should contact Millennium Trust Company and let them know you would like to include the data in your downloads. You must have an SL master created after you initiate the request with Millennium Trust Company.

Can Millennium Trust Company assist me with completing transfer paperwork?
Yes. Millennium Trust Company has processes for helping you fill out paperwork to expedite the transfer process, including bulk transfers. Contact Millennium Trust Company for assistance.

The following are available to assist you:

How to initiate a transfer or purchase assets for Schwab Alternative Investment Custody Services
How to subscribe to an investment available on Schwab Alternative Investment OneSource®
How to transfer assets to a Schwab account

See the following tools and resources to assist you with Schwab Alternative Investment Custody Services:

Guides and instructional resources

Client notification schedule for fair market value updates

Alternate custodians

To help ensure that your complete servicing needs are met, we have negotiated preferred pricing and servicing with Millennium Trust Company, although you may use any alternate custodian. You can download the data from these positions via Schwab's data downloads to ensure transparent recordkeeping and seamless service to your clients.

See the following for more information on Millennium Trust, along with their forms and applications:

Contact

Contact your service team with questions about our custody requirements for alternative investments.

Investing in alternative investments is speculative, not suitable for all clients, and generally intended for experienced and sophisticated investors who are willing and able to bear the high economic risks of the investment. Investors should obtain and carefully read the related offering memorandum, which will contain the information needed to help evaluate the potential investment and provide important disclosures regarding risks, fees, and expenses.

Schwab Alternative Investment OneSource® does not provide investment advisors or their clients advice about potential investment in participating funds. It is each investment advisor's responsibility to determine the suitability of such an investment for his or her clients. Alternative investments such as the participating funds are risky, and an advisor's clients may lose their entire investment in a fund.

Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. An investment in any offering made available through any third-party platform is speculative and involves a high degree of risk. Investors may lose all or a substantial portion of their investment. Alternative investment often employ leverage and other speculative practices that increase an investor’s risk of loss, often charge high fees, may require investors to satisfy capital calls, and can be highly illiquid and volatile. These investments may lack diversification, involve complex tax structures and have delays in reporting important tax information.

Risks of REITs are similar to those associated with direct ownership of real estate, such as changes in real estate values and property taxes, interest rates, cash flow of underlying real estate assets, supply and demand, and the management skill and creditworthiness of the issuer.

Investing in REITs may pose additional risks such as real estate industry risk, interest rate risk, and liquidity risk.

Schwab receives remuneration from fund companies participating in the Schwab Alternative Investment OneSource platform for recordkeeping, shareholder services, and other administrative services.

Schwab is not affiliated with Millennium Trust Company. Schwab does not endorse or recommend this company. Millennium Trust Company is a separate and independent financial institution responsible for its products and services.

Third-party firms and their employees are not affiliated with or employed by Schwab. Their mention should not be construed as a recommendation, endorsement, or sponsorship by Schwab. The views expressed are those of the third-parties and are provided for informational purposes only. The experiences shared are no guarantee of future performance or success and may not be representative of you or your experience.

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