The headquarters of the United States Securities and Exchange Commission in Washington on February 23, 2022.
Al Drago / Bloomberg via Getty Images
Charles Schwab has agreed to pay $187 million to settle an SEC investigation into hidden fees charged by the company’s robotics advisor, Schwab Intelligent Portfolio, according to an agency. notification in Monday.
“Robo-Consultor” stands for a digital investment service that uses algorithms to gauge how individuals’ funds are distributed among asset classes such as stocks, bonds, and cash.
Between March 2015 and November 2018, Schwab did not disclose to clients that its robot advisor had allocated funds “in a way that its own internal analyzes suggest would be less profitable for clients.” their products under most market conditions,” the SEC stated.
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As part of the settlement, three of Schwab’s subsidiaries – Charles Schwab & Co., Charles Schwab Investment Advisory and Schwab Wealth Investment Advisory – agreed to pay a civil penalty of $135 million and $52 million respectively. other for affected customers.
In a statement issued Monday, Schwab neither admitted nor denied the allegations and said the company was “happy to have resolved this matter for us.”
“We believe that solving problems in this way is in the best interests of our customers, the company and our shareholders as it allows us to continue to focus on helping our customers invest for their future.” “, follow statement. “As always, we are committed to earning the trust of our customers every day and work diligently to maintain the highest standards of professional conduct throughout our organization.”
Pull cash
The robot advisor is become more popular. They started appearing around 2008, with the advent of the iPhone and a flourishing digital culture. They could soon hold more than $1 trillion in American wealth.
The agency said the dynamic outlined by the SEC was due to an undisclosed “cash drag” on Schwab’s client portfolio, the agency said.
Cash often offers lower returns than stocks, for example, during periods of low interest rates and rising stock markets, as well as directional trends in 2015-2018.
Schwab advertised that clients’ cash allocations were determined using a rigorous portfolio method in search of optimal returns, according to the SEC. But the company’s data shows that allocating cash leaves customers with less money for the same amount of risk in most cases, the SEC said.
The company makes a profit by transferring cash to an affiliated bank, lending the money and pocketing the difference between the loan interest it receives and the cash interest it pays to its robot advisor clients. , according to the SEC.
“Schwab’s conduct is egregious and today’s action sends a clear message to advisors that they need to be transparent with clients about hidden fees and how such fees impact their clients’ bottom lines. like,” Gurbir S. Grewal, director of the SEC’s enforcement division, said Monday.
However, Schwab emphasizes that its Schwab Smart Portfolio Service allows investors to choose not to pay advisory fees in exchange for allowing the company to keep some of the proceeds in cash.
The company said “[does] does not hide the fact that our company generates revenue for the services we provide “and considers cash to be” a key component of any sound investment strategy through different market periods. “
