Charles Schwab pays $ 186 million in business regulatory deal with Robo-Adviser

WASHINGTON – Charles Schwab SCHW -2.67%

& Co. Inc. will pay more than $ 186 million to settle a regulatory investigation that found it did not adequately reveal how keeping a large share of customers’ assets in cash could harm return on investment.

The Securities and Exchange Commission said Schwab’s slave adviser portfolios held between 6% and 29.4% of their assets in cash instead of investing in stocks or other securities. The practice makes money for Schwab’s affiliated bank, which provides the money, and the investment adviser makes “false and misleading statements” in regulatory brochures on conflicts of interest, according to the SEC’s settlement order.

“Schwab claims that the amount of money in the portfolios of robo-advisors was determined by advanced economic algorithms designed to optimize the returns of its customers, when in fact it was decided by how much money the company wants to make,” said the SEC director. Gurbir S. Greval.

Schwab agreed to allow the investigation and pay fines without acknowledging or denying the misconduct. Schwab does not charge customers a fee for the uninvested part of their assets, which Schwab markets as an advantage because customers will keep more of their money, the SEC said.

Last year, Schwab revealed that it would pay about $ 200 million to settle the SEC’s investigation into its Schwab Intelligent Portfolios, a product for robot advisors that chose a combination of exchange-traded funds and money distribution to clients.

Schwab said on Monday that its Robo-Adviser product remains an important tool for customers. And cash remains a key part of a diversified investment strategy that takes into account changes in market trends, it said.

“We are proud to have created a product that allows investors to choose not to pay a consulting fee in exchange for allowing us to keep some of the revenue in cash, and we do not hide the fact that our company generates revenue from the services we provide.” , the company said in a statement.

Schwab and other money managers have used cash accounts in recent years to boost their own businesses. Bank-affiliated banks paid low interest rates on deposits and earned more than twice or even three times that return by lending. The percentage of a particular client’s portfolio held in cash varies depending on how aggressively or conservatively the person wants to invest, the SEC said.

The SEC said the abuse occurred between 2015 and 2018. Schwab changed its marketing and regulatory brochures in 2015 after two media articles criticized the cash program as stifling returns, the SEC said.

The revised brochures say that the percentages of cash are determined according to a formula that balances risk tolerance and the time frame for investing, according to the SEC. But cash levels were actually set “to meet minimum income targets” for Schwab, the regulator said.

Schwab’s latest regulatory brochure for its Intelligent Portfolios product, dated March, says the distribution of customer money will range from 6% to 30% of the bill’s value. The disclosure also noted that the practice could lead to “lower performance of the portfolio as a whole, for example when other riskier assets outweigh cash”.

The sanctions Schwab agreed to pay include a $ 135 million fine and about $ 51 million in ill-gotten gains that he has to repay. A total of $ 186 million could go to aggrieved investors, the SEC said.

As part of the agreement, Schwab agreed to cooperate with the SEC on related investigations and to hire an independent compliance consultant to review how it ensures the accuracy of customer disclosures.

Write to Dave Michaels at [email protected]

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