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Schwab to Pay $187 Million for Misleading Clients About Fees

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Schwab to Pay $187 Million

Schwab to Pay $187 Million for Misleading Clients About Fees

Charles Schwab has agreed to pay a total of $187 million to settle an SEC investigation into alleged hidden fees for Schwab Intelligent Portfolios, a digital investment service that uses algorithms to judge how to allocate individuals’ assets.

The Securities and Exchange Commission charged three Charles Schwab investment adviser subsidiaries for not disclosing that they were allocating client funds in a manner that their own internal analyses showed would be less profitable for their clients.

From March 2015 through November 2018, Schwab’s mandated disclosures stated that the amount of cash in the robo-adviser portfolios was determined through a “disciplined portfolio construction methodology,” and that the robo-adviser would seek “optimal return[s].” In reality, Schwab’s own data showed that under most market conditions, the cash in the portfolios would cause clients to make less money even while taking on the same amount of risk, the SEC said.

Schwab profited from the cash allocations in the robo-adviser portfolios by sweeping the cash to its affiliate bank, loaning it out, and then keeping the difference between the interest it earned on the loans and what it paid in interest to its clients.

As part of the settlement, three Schwab subsidiaries — Charles Schwab & Co., Charles Schwab Investment Advisory and Schwab Wealth Investment Advisory — will pay a $135 million civil penalty and an additional $52 million in disgorgement and interest to affected clients.

“Schwab’s conduct was egregious and today’s action sends a clear message to advisers that they need to be transparent with clients about hidden fees and how such fees affect clients’ returns,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement.

Charles Schwab also released a statement after it reached the settlement with the SEC. “We believe resolving the matter in this way is in the best interests of our clients, company and stockholders as it allows us to remain focused on helping our clients invest for the future,” the statement reads. “As always, we are committed to earning our clients’ trust every day and work diligently to maintain the highest standards for professional conduct throughout our organization.”

Schwab also noted that its Schwab Intelligent Portfolios Service lets investors elect not to pay an advisory fee in exchange for allowing the firm to hold some proceeds in cash.

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  1. Schwab branch advisers have product buckets to fill. Their compensation varies with each bucket. Compensation drives behavior.


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