Charles Schwab And Bank Of America: Retirement Investing At A Crossroads

Oct. 19, 2021 2:25 PM ETBAC, SCHW
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Mr. Torbert has spent the last 20 years in the private equity, operational management, business development and corporate finance world. He is a decisive, results-oriented leader with particular functional expertise in finance, team building and business strategy & development. Mr. Torbert has deep industry experience in the technology, media, telecommunications, alternative energy and transportation sectors. Moreover, strong industry and government contacts for business development, operational / revenue expansion and financing. Since 2006, Mr. Torbert has focused on investing in and enhancing middle market companies, notably roll up and platform company opportunities. As a founding investor and board member, Mr. Torbert played an integral role in the launch, development and $100MM Initial Public Offering of Mood Media (TSX: “MM”), formerly Fluid Music, Inc., an internet-based music services company. In conjunction with management, Mr. Torbert executed Fluid Music's acquisition of Trusonic, Inc., which enabled company to access public equity market and expand. In addition, he has played a vital role in the formation and growth of several other middle market-sized companies, including Midas Medici (OTB: "MMED"). Mr. Torbert has sourced and evaluated transactions in numerous sectors including financial services, transportation, media, technology and business services. In a very difficult distressed business environment, Mr. Torbert also orchestrated acquisition of two distressed assets in the aviation sector, Direct Air and Swift Air, with plan to restructure both companies. From 2004 to 2006, Mr. Torbert served as Chief Operating Officer of Broadcast Capital, a firm focused on investing in media and broadcasting sectors. He focused on managing the company's portfolio assets and expanding the investment mandate to include new media. Mr. Torbert oversaw firms operations and investment portfolio. From 1999 to 2004, Mr. Torbert was an investment banker at JPMorgan Chase. He served as a Vice President of the Financial Sponsor Group, Middle Market Banking, at JPMorgan Chase Bank (a subsidiary of JPMorgan Chase), where he was a member of a four-person team that covered the firm’s top tier middle market private equity clients. He was responsible for sourcing and financing private equity investment opportunities for financial sponsors investing in the middle market, with a special industry focus on media, transportation, healthcare, and consumer products transactions. Additionally, he completed over $100 billion in transactions in the media and telecommunications industry as a senior associate in the Equity Capital Markets Group, at JPMorgan Securities. Mr. Torbert also has held positions at AIG Capital Partners, where he focused on analyzing global private equity investments and on raising capital for the firm’s $1 billion Global Emerging Markets Fund.


  • If enacted, new legislation from Congress to the limit the size of IRAs will devastate investors who have saved smartly for retirement.
  • I look into two IRA providers (SCHW, BAC) who I think can best weather this impending storm.
  • Retail investors, small business owners, and the new generation of Robinhood traders will also face massive losses.
  • The integrity of our financial system is at risk, and I explore the potential consequences for investors.

Lawmakers in Washington want us to believe that their new proposed changes to the IRA system are solely aimed at the uber wealthy. The problem is that’s simply not true. Many of us as investors – either for our retirement or in financial institutions – are under direct assault. In fact, a large swath of investors nationwide who have invested in private retirement accounts are potentially in for a very rude awakening. As economist Ike Brannon recently wrote, “While some people may see Congress’ actions as being just against Peter Theil, many more will see it as a lesson to expect that their own Roth IRA may one day be on the hook as well, and that it’s always been a sucker’s bet.”

This proposal goes after both self-directed IRAs and so-called Backdoor IRAs, which is basically an IRS-sanctioned way of converting a traditional IRA into the Roth variety. Many investors have benefitted from these conversion opportunities. It’s important to remember that this is not a tax dodge. When we convert funds from a traditional IRA to a Roth IRA, we owe the government our share of taxes on the total amount transferred during that tax year. And the benefit is that, as investors in our own retirement, we owe no further taxes when we withdraw that money post retirement. Some in Congress, however, no longer like this. And the veil of “make the rich pay more” is all too convenient right now. Here’s how CNBC’s personal finance reporter Greg Iacurci shines light on what actually will happen. “If passed, the rule would apply to all retirement savers. Current owners would have to divest of such IRA holdings by the end of 2023 or lose the account’s tax benefits — potentially sticking them with a big tax bill.” That’s right; regardless of income level, no more Roth conversions. With our start and stop again economic recovery, further burdening investors large, medium, and small with more taxes on their retirement savings (of all things) seems unwise to say the least.

So, now, who is best prepared for this onslaught against their business? For starters, I like Charles Schwab (NYSE:SCHW) as a long-term play that will rise above this government folly. Schwab currently has 29.6 million active brokerage accounts and 2.1 million corporate retirement plan participants. While many of these participants would be hurt, I think the acquisition of TD Ameritrade was well timed insofar as giving the company additional resources to help its clients figure out this possible jolt to their retirement portfolios. Indeed, the acquisition brought an enhanced customer experience through the integration of industry-leading platforms.

Total client assets continue to benefit from strong capital markets, now topping $7.57 trillion, which, per Morningstar, are up 84% YoY. Also, according to CFRA, investing $10,000 in SCHW five years ago would give you $27,689 today. Company performance has been incredibly strong as of late, too. That’s always good with a direct headwind approaching. SCHW’s nine-month price performance is beating the sector’s median by 253.87%. Perhaps more alluring, see the chart below for SCHW’s one-year performance, during which shares are up more than 100%.

Source: Seeking Alpha

Second, I think Bank of America’s (NYSE:BAC) Merrill Lynch arm is also well-positioned to withstand this strike against its retirement savings business. For the Global Wealth and Investment Management (GWIM) segment where Merrill sits, average deposit balances increased in Q4 2020 was $306 billion, up 20%. I always like to use EPS as a leading indicator when examining a certain company. BAC’s YoY growth for this coming December’s EPS consensus estimate is a whopping 71.32%.

GWIM spent much of last year scaling its footprint, as well. The bank added roughly 22,000 Merrill and 1,800 private bank relationships in 2020, resulting in client balances at a historical peak of $3.3 trillion. Merrill advisors are continuing to help the firm’s clients navigate the rapidly changing financial landscape; I believe this time around with IRAs will be no different.

Finally, the unintended consequences for investors of these proposed cuts to IRAs are many. Yes, the language eliminates Roth 401K conversions for IRAs and employer-sponsored plans for single filers making $400,000 or more and joint filers making $450,000 or more. And yes, those filers are certainly high earners. However, we should be thinking about how we can increase savings all across the entirety of the income spectrum. Tax policy based on malice toward a particular segment of the population only dampens investor sentiment in the broader markets.

To reiterate, these “middle of the game” changes to our retirement savings system rotten the lot for everyone. We will see this manifest in reduced savings across the board. Savings decisions of millions of investors will be further complicated. Younger “Robinhood investors” will no longer have the safe haven of an IRA. Most discouraging for me as a small business owner and investor: IRAs that hold private, non-public investments in such assets as a non-listed small business, a strip mall, or even a small farm would face gigantic tax liabilities if the IRA’s owner of beneficiary fails to divest those types of investments. Investors have never seen anything quite like this.

The team at Midland Trust Company has perhaps summed up best what is at stake here: “This proposal has several components that include limiting your IRA investment choices, capping the maximum value of an IRA, eliminating certain Roth Conversions, limiting IRA ownership in LLCs, and even forcing distributions for some taxpayers. These proposals caught most people off guard…” You can say that again. This monumental change to how we can save for our later years will ultimately only hurt average investors. Plus, this course of action amounts to a double tax on the income investors save for retirement. Any government changes to retirement investing must always be transparent and in the best interest of the broadest population.

I hope investor awareness grows considerably if these deleterious cuts to retirement investing become an increasing reality later this year. In the meantime, I remain bullish on SCHW and BAC as two institutional plays to ride out this potentially steep trough.


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