Schwab to pay $187 million after SEC says robo-advisers misled investors
Source: Washington Post
BUSINESS
Schwab to pay $187 million after SEC says robo-advisers misled investors
The brokerage giant’s automated advisory program held large portions of clients’ funds in cash even though they could have fared better on low-risk investments, the regulator says
By Jacob Bogage
June 13, 2022 at 1:43 p.m. EDT
Brokerage giant Charles Schwab will pay $187 million to resolve charges from federal regulators that its robo-advisers did not tell clients they would have been better off investing a larger share of their cash in funds rather than tie it up in Schwab’s investment bank. ... The Securities and Exchange Commission accused Schwab — which controls $7.28 trillion in client assets — of developing automated advisory bots that recommended investors keep 6 percent to 29.4 percent of their holdings in cash, rather than invest them in stocks or other securities. Investors stood to gain significant income if that money had been invested; instead Schwab used the cash to issue loans and collect interest on those funds.
The settlement announced Monday does not require Schwab to admit wrongdoing, and in a statement the company said, “We believe that cash is a key component of any sound investment strategy through different market cycles.” The SEC alleged that Schwab’s own data showed that under most market conditions investors participating in the “Schwab Intelligent Portfolios” program would lose out on low-risk earnings.
“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,” Gurbir S. Grewal, director of the SEC’s division of enforcement, said in a statement. “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 company should have disclosed that its “Intelligent Portfolios” product reserved a significant chunk of funds in liquid form, the SEC charged. As part of the settlement, Schwab agreed to a cease-and-desist order from the practices, a censure, and will retain an independent consultant to review its robo-adviser disclosures, marketing and advertising.
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By Jacob Bogage
Jacob Bogage writes about business and technology for The Post, where he has worked since 2015. He previously covered the automotive and manufacturing industries and wrote for the Sports section. Twitter https://twitter.com/jacobbogage
Read more: https://www.washingtonpost.com/business/2022/06/13/schwab-pay-187-million-after-sec-says-robo-advisers-misled-investors/
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