Schwab Will Pay $187 Million To Settle Claims It Misled Clients

Topline

Charles Schwab will pay nearly $200 million after a Securities and Exchange Commission probe found its “robo-advisory” services advised clients to invest sub-optimally and didn’t adequately warn clients of hidden fees, the SEC announced Monday.

Key Facts

The SEC said three Schwab investment subsidiaries, using the company’s Schwab Intelligent Portfolios robo-advisor, allocated client assets to cash investments in a way the company knew “would cause clients to make less money even while taking on the same amount of risk” between March 2015 and November 2018.

Schwab in turn took the extra cash and made extra profit by loaning it through its affiliate bank, the SEC alleged.

Schwab “neither admits nor denies the allegations,” the company said in a statement Monday defending its robo-advisor products.

The company will pay $186.5 million—$135 million civil fine and $52 million in disgorgement and prejudgment interest payments—to harmed clients.

Crucial Quote

“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,” Gurbir Grewal, director of the SEC’s Division of Enforcement, said in a statement.

Tangent

Shares of Schwab fell 2.7% in Monday trading, closely following a broader market selloff and likely unaffected by the payout, as the firm reported a nearly $200 million charge in the second quarter of 2021 related to the SEC investigation.

Big Number

33.6 million. That’s how many active brokerage accounts Charles Schwab managed as of the end of the 2022 first quarter, according to the company’s most recent SEC filings in April, with a total of $7.86 trillion in client assets.

Further Reading

Schwab’s $200 Million Charge Puts Scrutiny on Robo-Advising (Bloomberg)