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Charles Schwab to pay $187 million over SEC charges it misled investors about robo-advisor

On Behalf of | Jun 23, 2022 | Investment Loss

Charles Schwab & Co. has reached a settlement with the Securities and Exchange Commission over charges it misled investors about its robo-advisor service, AdvisorHub reports.

The SEC said that from March 2015 through November 2018, three Schwab investment adviser subsidiaries made false and misleading statements about the cash component of the robo-advisor, Schwab Intelligent Portfolios.

The automated investing service held between 6% and 29.4% of client assets in cash. According to the charges, the mandated disclosures for the product said the amount of cash in the portfolios was determined through a disciplined portfolio construction methodology and that the robo-adviser would seek optimal returns.

”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 in its cease-and-desist order. Schwab allegedly did not tell customers about the ‘cash drag’ on their investments, even though the robo-advisor was advertised as not having advisory or hidden fees. As a result, the investors could not make a fully informed decision about whether they benefitted from the lack of an advisory fee.

Schwab made money by sweeping cash to an affiliate bank, loaning it out and then keeping the difference between the interest it earned on the loans and the interest it paid to robo-adviser clients, according to the SEC.

“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, who called Schwab’s conduct “egregious.”

The SEC said Charles Schwab & Co., Inc., Charles Schwab Investment Advisory, Inc., and Schwab Wealth Investment Advisory, Inc., agreed to be censured and to pay a $135 million civil penalty along with about $52 million in disgorgement and prejudgment interest. Schwab did not admit or deny the findings, but consented to a cease-and-desist order prohibiting them from violating the antifraud provisions of the Investment Advisers Act of 1940.

A spokesman for Schwab said the company was pleased to put the matter behind them while remaining proud of its Schwab Intelligent Portfolios product.

The attorneys at Lewitas Hyman have decades of experience dealing with securities fraud cases and have a deep understanding of how capital markets and financial service firms are intended to work to protect investors. We bring a unique level of knowledge and experience when representing the rights of investors, including resolving cases through arbitration and litigation when necessary. If you think your financial professional or firm engaged in misconduct that caused you investment losses, contact Lewitas Hyman at (888) 655 6002 or through our online contact form for a no-cost evaluation of your matter.