If you’re working with a financial advisor, do you know the answer to this question:
Where are your assets held, and how are they safeguarded?
In this video, Mike Greim & Chad Chase discuss what Charles Schwab does for CGN, and what they do for you. They walk through Schwab’s role as our custodian, why having an independent third party hold your assets helps shield you, and how this structure lets our team stay focused on planning and investment decisions.
We hope this sheds light on how this added layer of independent custody safeguards you and your financial plans. If you have questions about where your assets are held or how Schwab fits into your plan, reach out to your advisor or call our office at (785) 340-3434. Watch now!
Transcript
What Does Charles Schwab Do for CGN Advisors and Our Clients?
Chase: I’m Chad Chase, Managing Principal and Senior Advisor here at CGN Advisors. With me today is Mike Greim, Managing Principal of Investments, also here at CGN. And today we’re going to answer a question that we frequently get.
And that question is, what does Charles Schwab do for CGN Advisors and our clients? So, Mike, let’s start there.
Mike: Chad, that is a great question. So Charles Schwab, we’ve engaged with them to be our primary custodian.
What Does a Qualified Custodian Do?
Mike: So as a qualified custodian, they’re charged with safekeeping our clients’ assets, collecting dividends, and making sure the tax reporting is correct. So they hold our clients’ assets on our behalf.
Chad: A lot of times I’ll say to our clients that Schwab is just a bank that is holding the assets on behalf of our clients. Is that somewhat accurate?
Mike: I think that’s a reasonable description. They aren’t technically a bank, right.
Although they do own a bank, and that’s a whole other conversation. A whole other can of worms there. Yes.
Does Charles Schwab Make Investment Decisions for CGN Advisors?
Chase: The other question that we get is, does Schwab recommend any investments or are they involved in the investment process at all?
Mike: So Schwab isn’t involved in our investment process. One of the things that’s important for us is to have a custodian that allows us to remain independent to where we can make those investment decisions right here at the home office for CGN for our clients. And so our investment team does all the primary research, decides what to own in client portfolios, and decides when to rebalance or trade those portfolios.
So when activity happens in an account, other than dividends being posted or kind of cash being swept here or there into something earning interest, that’s our team making those decisions. So they’re not buying or selling stocks or mutual funds, and they certainly don’t restrict us on what we can own.
Why Does CGN Advisors Use Charles Schwab As a Custodian?
Chad: So why does CGN use Schwab specifically, then?
Mike: Well, one of the things we think is important as a registered investment advisor firm, we think it’s important to have an independent third-party custodian to safekeep our clients’ assets.
That way, we as a firm don’t have custody of your assets. In other words, we’re not able to transact on your behalf to move your assets outside of your control. We think that’s important, and so Schwab maintains that third-party relationship, kind of that arm’s-length approach, if you will.
So they’re there really to protect our clients and then allow us to do what we’re good at, which is financial planning and investment management.
Does CGN Advisors Use Custodians Other Than Schwab?
Chad: Does CGN Advisors use any other custodians besides Schwab’s?
Mike: Yeah, so Schwab is the primary custodian, so most of our clients’ portfolios are going to be held through Schwab. We do have certain situations where there are specialty kind of custodians for things like 529 plans, college savings plans.
We have a relationship separate from Schwab there. We have clients that have historically purchased annuities or might need a fee-only type of annuity situation for their financial plan, and we have relationships with third parties like Nationwide, as an example, to help us with those. We also have a relationship with TIAA-CREF, which helps us work with our clients that have assets in qualified 403(b) plans through universities and whatnot.
So those are just a few. We have other relationships as well. We certainly have some specialty relationships, so if Schwab is not right for our client, we can choose another custodian for them.
Why Is Schwab CGN Advisors’ Primary Custodian?
Mike: For the most part, Schwab being really the largest independent custodian now for the Registered Investment Advisor space, the safety in utilizing Schwab, we can’t look past that. Their technology platform is top-notch. They weren’t just built yesterday, so obviously we feel like our clients’ assets are pretty safe there.
They also have solid financials. Their balance sheet is strong. Now, that’s not overly important for our clients’ portfolios because our clients’ accounts are held separately from Schwab’s balance sheet.
They’re not part of their balance sheet, but it’s important to know that Schwab, as a company, is a strong company that we anticipate will be around for a long time. So they do bring a lot to the table, allowing us to do a great job of working with our clients.
How Are Client Assets at Charles Schwab Protected?
Chad: I might throw you a curveball here, but you mentioned safety and soundness of assets at Schwab. Are there assets, is there any insurance or any safekeeping that we might want to point out to clients there?
Mike: Sure. So Schwab does maintain an umbrella liability policy.
Honestly, I can’t recall the coverage amount. It’s big, I know that.
It’s bigger than our clients need to worry about, but that does protect against fraud and those types of things. They also are part of SIPC, which brokerage firms, so Schwab is technically a brokerage firm, have to carry that type of insurance, which, again, is mostly for fraud or errors, if you will, on behalf of client portfolios. So not protecting against losses due to market loss or protecting clients against those types of activities.
What Happens to Client Assets if a Custodian Fails?
Mike: But, again, clients’ assets are held separately from Schwab. So even if Schwab or any custodian that we would choose in the future should happen to fail, which we’re not concerned about with Schwab, but if a firm like that were to fail, thinking back to the financial crisis days, our clients’ assets would still be safe. They would just simply be able to move from Schwab to another custodian.
And so we think that’s important to note. It is important, as I mentioned earlier, that Schwab also does own a bank. So that’s a separate part of their revenue and earning stream, if you will.
What Lending Services Are Available Through Schwab?
Mike: But because they own a bank, they do have some lending services we can leverage for our clients’ purposes. As an example, pledged asset lines; some of our clients will take advantage of that whenever they need to have liquidity for their portfolio, but they don’t want to liquidate the portfolio, take capital gains.
Maybe they even have a short-term transaction like buying a second home while they’re waiting to sell their first home. Those types of things, pledged asset lines can be pretty useful for that. We certainly can also work with local banks, and we’ve done that as well, and still collateralize those loans with local banks.
It’s just kind of having those opportunities to do what’s best for our clients.
Chad: Yeah. No, that’s a great point. And especially when it comes to some planning opportunities when clients might need some short-term liquidity. So that’s great.
How Does Charles Schwab Make Money?
Chad: Another question that we get is, so how does Schwab make money?
Mike: Well, Schwab makes money in quite a few ways, but primarily the way Schwab makes money is they make money on the cash that’s in the accounts.
So the cash, what we call cash sweep or custodial cash, is the money that anytime a security is purchased or sold, or if dividends are paid to the account, all of those things get paid to this sweep cash or custody cash account. I think in the Schwab statements, it would say Schwab cash. That cash doesn’t pay much of anything.
Think of that like a checking account for all intents and purposes. So Schwab sweeps that money back to Schwab Bank that we talked about. And so they’re making interest spread on that just like any other bank would.
How Does CGN Advisors Manage Idle Cash?
Mike: Now, because of that, obviously, we want Schwab to earn a living too because we need them to be a strong, solid custodian. But that cash doesn’t earn a lot. So oftentimes we’re sweeping that out to a money market mutual fund.
Typically those would be a Schwab money market mutual fund because that’s cost-effective to do for our clients. I’ll talk about that in a second. But that way, that cash that’s sitting idle, that’s not invested in stocks or mutual funds or bonds, is earning a better rate.
Today that rate is about 3.35% or so. We go about our business to make sure that cash is not sitting idle for our clients. In that case, Schwab would make their management fee on that mutual fund, which is the internal expense ratio.
Again, that’s not a significant amount. That’s the sweep on their cash would be a larger dollar amount. Other places, they would make money if we happen to purchase anything on margin, which we do not.
But they do make that money from other advisory firms where their clients are purchasing things on margin.
Does Schwab Charge Trading Fees?
Chad: And what about trading costs?
Mike: Yeah, trading costs. That’s the last piece.
So typically most of our clients own individual stocks and ETFs (exchange-traded funds) that trade like stocks do. So most transactions happen that way for our clients. There is not currently an explicit transaction fee on domestic stocks and ETFs, meaning we can trade without there being a transaction cost.
What Is Payment for Order Flow?
Mike: Schwab earns on the back end because they’re clearing those trades through trading partners and across the globe, if you will. They’re earning what’s called pay for order flow. So think pennies on the dollar, if you will, for those trades to happen.
That’s the way most brokerage firms make money these days, whether it’s firms that are popular with younger folks like Robinhood or whatnot. It’s pay for order flow, basically. So that way they don’t have to charge an explicit fee to the client.
Are There Fees for Mutual Funds or Alternative Assets?
Mike: So we know that that’s the case. The other way that they can make money is certain mutual funds would have a transaction fee associated with them. That’s typically $24.
Certain funds are $49 per trade. Again, we don’t purchase a lot of those for our clients because that’s one of those things we can control. We’re looking to purchase things for our client portfolios that ultimately can be cost-effective.
So we’re usually not purchasing things like that. But that would be another place where they could have that. They may have fees for if clients have alternative types of assets, which, again, not a lot of our clients do, but they might charge an annual custody fee for that.
Do CGN Advisors’ Clients Pay Schwab Directly?
Mike: So, generally speaking, things that are disclosed, you’re not going to see a lot of things that you wouldn’t know what the fee is, but primarily because of the way that we work with Schwab, our clients don’t have a direct cost associated with Schwab. It would be really that spread on the money market that we’re talking about and the pay for order flow. So, again, that allows our clients to have a very cost-effective type of account.
Chad: And as I tell clients, I mean, we’re conscientious of these costs because no one in this room is making any money off that, and the clients aren’t either.
Is CGN Advisors Independent From Charles Schwab?
Mike: So that’s important, Chad. I mean, our relationship with Schwab is independent. We could choose a different custodian at any time. Our clients ultimately signed that paperwork, and so our clients would also have to agree to that to move to a different custodian.
We certainly are satisfied with Schwab and what they do for our clients, but we maintain relationships with other firms so that if we need to make a change, we’ve already done work with other firms.
How Does CGN Advisors Evaluate Its Custodial Relationship?
Mike: So we’re constantly doing due diligence to make sure that Schwab still is the right partner for us and all of our clients. But, again, to your point, we’re not incented by Schwab and they’re certainly not incented by us.
In fact, if anything, as a firm and as a fiduciary, we go about our business in such a way that we ensure that our clients’ accounts are cost-effective. And I think that’s important.
Closing Thoughts on CGN Advisors and Charles Schwab
Chad: I think that’s great. Well, I appreciate everyone’s time. Appreciate your time, Mike.
And I think that was a great insight into what Charles Schwab does for CGN Advisors and our clients and being able to maintain our independence as an independent fee-only fiduciary for our clients. So on behalf of Mike, I appreciate everyone’s time.
If you have questions, please reach out to your individual advisor or call our office at 785-340-3434. Thank you.