Charles Schwab to pay $187M to settle SEC claims over robo-advisers

Top Class Actions’s website and social media posts use affiliate links. If you make a purchase using such links, we may receive a commission, but it will not result in any additional charges to you. Please review our Affiliate Link Disclosure for more information.

Charles Schwab Robo-Adviser Settlement Overview:

• Who: Three Charles Schwab subsidiaries have reached a settlement with the U.S. Securities and Exchange Commission (SEC).
• Why: The settlement will resolve allegations Charles Schwab misled investors with its robo-adviser service.
• Where: The SEC heard the case.

Charles Schwab Corp. will pay $187 million as part of a settlement with the U.S. Securities and Exchange Commission (SEC) over allegations that three robo-adviser subsidiaries misled clients about their investments, Law360 reports.

Robo-adviser services are advertised as services that provide automated financial planning services with minimal human supervision.

SEC says robo-adviser service allocated client funds to cash, deposited the money in Charles Schwab banks

From March 2015 to November 2018, Charles Schwab allegedly used a robo-adviser service called Schwab Intelligent Portfolios that allocated a fixed percentage of clients’ funds to cash and deposited the money into a Charles Schwab bank. Schwab reportedly held between 6% and 30% of its clients’ assets in cash.

As a result, the clients’ portfolios were reportedly less profitable than they would have been if their funds had been invested differently and underperformed one of Schwab’s competitor’s portfolios at all risk levels even if the competitor charged an advisory fee.

“Schwab advertised the robo-adviser as having neither advisiory nor hidden fees but didn’t tell clients about this cash drag on their investment,” according to the SEC.

Instead of informing clients that a fixed percentage of cash in the portfolios would be deposited in a Charles Schwab bank, the product disclosure stated that the robo-adviser would seek “optimal” returns for clients and determine the amount of cash in the portfolio based on a “disciplined construction methodology.”

The three Charles Schwab subsidiaries will reportedly pay $52 million in disgorgement of profits and prejudgment interest. They will also pay a $135 million civil penalty, according to the SEC settlement documents.

“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 S. Grewal, head of the SEC’s enforcement division, said in a statement.

Last year, a group of investors filed a class action lawsuit that alleges Charles Schwab’s robo-adviser portfolio breaches its fiduciary duty by concentrating investments in cash, prioritizing Schwab’s profits over clients’ financial interest.

Did you use Charles Schwab’s robo-adviser service? Tell us what you think of the SEC settlement in the comments below.

The Charles Schwab robo-adviser lawsuit is In the Matter of Charles Schwab & Co. Inc., et al., Case No. 3-20897, before the Securities and Exchange Commission.

Read About More Class Action Lawsuits & Class Action Settlements:

• American Banking Systems (ABS) data breach $1.7M class action settlement
• Consumers file bank class actions as Zelle fraud cases mount
• Hidden inflation fees on restaurant, retail, service receipts | class action lawsuit investigation
• ‘Shrinkflation’ results in reduced package sizes as prices remain same