Features & Services Section

Introduction to pledged asset accounts

Introduction to pledged asset accounts

A Pledged Asset Account Broker-Dealer (PAABD), also known as a collateral account, is an account in which your client enters into an agreement with another financial institution to pledge their Schwab brokerage account assets as collateral for a loan from that institution.

If pledging an account with TriState or Goldman Sachs Bank as the lender, contact your service team to obtain the appropriate paperwork.

A PAABD account is not the same offer or product as the Pledged Asset Line® (Demand) or its associated Pledged Account. If your client is interested in a Pledged Asset Line offered by Charles Schwab Bank, SSB or Charles Schwab Premier Bank, SSB, see Introduction to the Pledged Asset Line® (Demand).

Key features related to pledged asset accounts:

  • No fees to set up or maintain account
  • Potential tax consequences caused by the sale of assets are avoided
  • Investment borrowing kept separate from non-purpose borrowing

Key information related to pledged asset accounts:

  • Significant risks are associated with a pledged asset account, including:
    • Lender can force the sale of securities in the account to meet a collateral call without contacting the account holder
    • Account holder is not entitled to choose which securities in their account are sold to meet a collateral call
    • Account holder is not entitled to an extension of time to meet a collateral call
  • Standard commissions apply for all trading in the account

For information regarding features, disbursements, termination, and more, refer to the following table:

Account features

Available features:

  • Limited power of attorney/full power of attorney
  • Schwab One® Interest
  • Bank Sweep

Unavailable features:

  • Schwab BillPay®
  • Schwab Bank Investor Checking®
  • Margin
  • Options
  • Schwab One Checks
  • Schwab One Visa® Platinum Debit Card
Account funding
  • The account can be funded by another Schwab account using a journal transaction.
  • When an existing Schwab account is converted to a PAABD, the assets in the account are the assets used to establish the pledge. Schwab will not accept restricted stock to either fund or for subsequent deposit to a PAABD.
Disbursements All disbursements require the written consent of the financial institution on the financial institution's letterhead.

Account holder authorization is also required for all third-party disbursements. If the account holder has granted Withdrawal power financial advisor (WPFA) or Withdrawal power financial advisor-custody (WPFA-C) to their investment advisor, the investment advisor may sign or verbally authorize disbursements going to the identically named or first-party accounts on the account holder's behalf. Written consent from the financial institution is also required.
Pledged Asset Account Agreement for Third-Party Pledgors Schwab requires a Third-Party Pledgor form if the loan is in the name of a person or entity not listed on the registration of the Schwab account being pledged.

Examples:
  • An entity account at Schwab and the loan is for an individual person.
  • A joint account at Schwab and the loan is for an individual person.
  • A living trust at Schwab and the loan is for an individual person.
These scenarios require the Third-Party Pledger form, because the client(s) are acting in a different capacity.
Loan default

If the account holder defaults on the loan, the lender can take control of the assets held in the Schwab PAABD. The lender must provide written notification (Notice of Control letter) to Schwab that it is exercising control of the PAABD under the terms of the Pledged Asset Account Agreement. Schwab will immediately cease taking any account instructions from the account holder and investment advisor.

A sample of a Notice of Control letter that a lender can use to provide Schwab with a notice, is located on attachment 2 of our pledged agreements.

Account termination The PAABD is terminated when the lender notifies Schwab the loan can be released or Schwab terminates the account agreement.

If Schwab terminates the pledged asset relationship with the account holder, Schwab sends a letter to inform both the account holder and the lender of the termination.
  • The account holder has 60 days to transfer the pledged assets to another financial institution.
  • If, after 60 days, the account holder fails to find another financial institution, the collateral will be transferred to the lender.

Review the account type registrations eligible for pledging as collateral.

Eligible account types Ineligible account registrations
A new pledged asset account is opened as a Schwab One account.

An existing account being converted to a pledged asset account may be registered as a brokerage or Schwab One account of the following types:
  • Individual
  • Joint tenants with rights of survivorship
  • Revocable living trust
  • Tenants in common
  • Tenants by the entirety
  • Community property
  • Community property with rights of survivorship
  • Custodian
  • Conservatorship
  • Estate
  • Fiduciary trust
  • Guardianship
  • Investment club
  • Retirement
  • Testamentary trust
  • 529 College Savings Plan

Are there any restrictions for lenders using Schwab pledged asset accounts as collateral for a loan?
In general, only FDIC-insured organizations may lend using pledged asset accounts as collateral.

Can changes be made to the standard Pledged Asset Account Agreement?
No. Changes to the standard agreement will not be accepted.

Will Schwab sign the lender’s own agreement or loan contract?
Schwab will only sign our own Pledged Asset Account Agreement. Ask the lender to review the agreement in detail to determine if it meets their needs.

Can a MoneyLink or Standing Authorization be set up for disbursements from a pledged asset account?
Yes. However, lender consent is required. Contact your service team for the appropriate standing authorization form for your situation.

Can managed accounts be used as collateral?
Yes, accounts enrolled in the Managed Account Marketplace®, Managed Account Select® or Managed Account Access® platforms can be pledged. The Managed Accounts Pledged Asset Account Agreement must be used to pledge the account.

How can an account holder change the lending institution relationship and transfer their collateralized loan?
Letter of Termination or Release from the existing lender is required as are new agreement forms. Contact your service team to review requirements.

Can a PAABD account hold an Alternative Investment?
Yes, it can. No additional documentation is required.  

How to add features to an account
How to add a power of attorney to an account

For questions about the pledged asset account application process or about asset eligibility, call your service team.

Additional resources include:

  • Account Application (Schwab One Personal Accounts)
  • Managed Accounts Pledged Asset Account Agreement
  • Managed Accounts Pledged Asset Account Agreement for Third Party Pledgors
  • Pledged Asset Account Agreement
  • Pledged Asset Account Agreement for Third-Party Pledgors