Brokerage giant Charles Schwab will pay $187 million to resolve charges from federal regulators that its robo-adviser did not tell clients they would have been better off investing a larger share of their cash in funds rather than tie it up in Schwab’s bank.
The settlement announced Monday does not require Schwab to admit wrongdoing, and in a statement the company said, “We believe that cash is a key component of any sound investment strategy through different market cycles.” The SEC alleged that Schwab’s own data showed that under most market conditions investors participating in the “Schwab Intelligent Portfolios” program would lose out on low-risk earnings.
“Schwab claimed that the amount of cash in its robo-adviser portfolios was decided by sophisticated economic algorithms meant to optimize its clients’ returns when in reality it was decided by how much money the company wanted to make,” Gurbir S. Grewal, director of the SEC’s division of enforcement, said in a statement. “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.”
The company should have disclosed that its “Intelligent Portfolios” product reserved a significant chunk of funds in liquid form, the SEC charged. As part of the settlement, Schwab agreed to a cease-and-desist order from the practices, a censure, and will retain an independent consultant to review its robo-adviser disclosures, marketing and advertising.
The $187 million fine includes a $52 million forfeiture of profits derived from the “Intelligent Portfolios” program and a $135 million civil penalty. Some of those funds will be distributed to harmed investors, the company said.
Schwab made “false and misleading statements” on regulatory certifications from 2015 to 2018, the SEC asserted in its settlement order, about both the amount of cash Schwab held of its clients’ money and conflict of interest disclosures.
During the same period, Schwab advertised the “Intelligent Portfolios” program as a “no-advisory-fee” product, however it offered significantly fewer investment options by maintaining such a large cash balance.
“Investors were unable to make a fully informed decision regarding whether the lack of an advisory fee benefited them,” the settlement order said.
“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 company’s statement said. “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’s stock fell 1.2 percent in midday trading, though the market as a whole faced widespread losses. The Dow Jones industrial average slumped more than 2 percent.
