Charles Schwab (NYSE:SCHW) settled Securities and Exchange Commission charges that the firm’s robo-advised funds misled clients about the the returns they would get on their portfolios as the cash portion would create a drag, the SEC said Monday. Schwab subsidiaries agreed to pay $187M to harmed clients to resolve the case, the SEC said.
The company’s three investment adviser subsidiaries didn’t disclose that “they were allocating client funds in a manner that their own internal analyses showed would be less profitable for their clients under most market conditions,” the SEC said.
From March 2015 through November 2018, Schwab’s (SCHW) mandated disclosures for its robo-adviser product, Schwab Intelligent Portfolios, stated that the amount of cash in the robo-adviser portfolios was determined through a “disciplined portfolio construction methodology,” and the robo-adviser would seek ‘optimal return[s],’ the SEC said.
Schwab’s data, though, 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. Schwab marketed the robo-adviser as having neither advisory nor hidden fees, but didn’t tell its clients about the cash drag on their investment.
Meanwhile, Schwab (SCHW) made money from the portfolios by sweeping cash to its affiliate bank, loaning it out, and keeping the difference between the interest it earned on the loans and what it paid on interest to the robo-advised clients, the SEC said.
Without admitting or denying the SEC finding, Schwab’s (SCHW) three investment adviser subsidiaries agreed to a cease-and-desist order prohibiting the company from violating antifraud provision in the Investment Advisers Act of 1940.
source: Seeking Alpha