The seal of the U.S. Securities and Exchange Commission (SEC) is seen at their headquarters in Washington, D.C., U.S., May 12, 2021. REUTERS/Andrew Kelly/File Photo
WASHINGTON, June 13 (Reuters) – The U.S. Securities and Exchange Commission (SEC) on Monday said it charged three Charles Schwab Corp (SCHW.N) investment adviser subsidiaries with failing to disclose less profitable fund allocations and misleading its robo-adviser clients.
From March 2015 through November 2018, Schwab touted that its robo-adviser would seek “optimal returns” to investors, whereas in reality the brokerage’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 found.
The Texas-based firm advertised the robo-adviser as having neither advisory nor hidden fees, but didn’t tell clients about this cash drag on their investment. In turn, it made money from the cash allocations in the robo-adviser portfolios by sweeping the cash 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, the SEC said.
“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 SEC enforcement chief Gurbir Grewal.
“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.”
The SEC’s order comes as the Wall Street watchdog has stepped up scrutiny of brokerages’ use of robo-advisers and the often misleading disclosures to investors around returns. It has also issued a range of rule proposals meant to boost investor disclosures, including one on digital engagement practices, among others.
Washington-based reporter covering U.S. regulation at the Securities and Exchange Commission and the Consumer Financial Protection Bureau, previously e3xperience in Ecuador, alumnus of Morehouse College and Northwestern University’s Medill School of Journalism.
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