The Securities and Exchange Commission said Monday that three investment adviser subsidiaries of Charles Schwab Corp. agreed to pay $187 million to settle charges that they misled clients about fees in the broker’s robo-adviser program, Schwab Intelligent Solutions.
said the disclosures started in 2015 and ended four years ago in 2018. The company already disclosed a $200 million charge for the cost of the settlement and disclosed it in an 8-K filing on July 1, 2021.
The SEC charged Schwab for not disclosing that they were allocating client funds in a manner that their own internal analysis showed would be less profitable for their clients under most market conditions.
The SEC said Schwab profited by sweeping cash from clients in its Schwab Intelligent Solutions unit 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 the robo-adviser clients.
“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,” said Gurbir S. Grewal, director of the SEC’s Division of Enforcement.
Schwab did not admit or deny the SEC’s findings and agreed to a cease-and-desist order. The company units involved in the probe agreed to hire an independent consultant to review their policies and procedures related to their robo-adviser disclosures, advertising and marketing.
Shares of Schwab fell 1.6% on Monday. The stock is down 28.6% so far in 2022, compared to a loss of 20.3% by the S&P 500 SPX, -2.79%.
In a statement, Schwab said Schwab Intelligent Solutions recommends a portfolio based on client goals, time horizon and risk profile and keeps the allocation consistent through automated rebalancing as markets fluctuate.
“We are proud to have built a product that allows investors to elect not to pay an advisory fee in return for allowing us to hold a portion of the proceeds in cash, and we do not hide the fact that our firm generates revenue for the services we provide,” Schwab said. “We believe that cash is a key component of any sound investment strategy through different market cycles.”
Schwab Wealth Investment Advisory, Inc., Charles Schwab Investment Advisory, Inc. and Charles Schwab & Co. Inc. will pay $186.5 million to be deposited into a fair fund account for distribution to affected investors, the company said.