Charles Schwab pays more than $ 186 million in a robo-adviser deal

WASHINGTON- Charles Schwab SCHW -3.18%

& Co. Inc. will pay more than $ 186 million to resolve a regulatory investigation that found it did not adequately disclose how keeping a large share of client assets in cash could hurt investment returns.

The Securities and Exchange Commission said Schwab’s robo-advisor portfolios kept between 6% and 29.4% of their assets in cash, instead of investing the money in stocks or other securities. The practice made money for Schwab’s affiliate bank, which lent the cash, and the investment advisor made “false and misleading claims” in regulatory brochures on conflict of interest, the SEC said in a settlement order.

“Schwab said the amount of money in its robo-adviser portfolios was decided by sophisticated economic algorithms aimed at optimizing its clients’ returns when in fact it was decided how much money the company wanted to make,” said the SEC Director of Law Enforcement Gurbir S. Grewal.

Schwab agreed to terminate the investigation and pay penalties without admitting or denying misconduct. Schwab did not charge customers a fee for the uninvested portion of their assets, which Schwab marketed as a benefit because customers would keep more of their money, the SEC said.

Schwab revealed last year that it would pay about $ 200 million to settle the SEC’s investigation into its Schwab Intelligent Portfolios, a robo-advisor product that chose a mix of exchange-traded funds and a cash allocation to customers.

Schwab said on Monday that its robo-adviser product remains an important tool for customers. And liquidity remains a key element of a diversified investment strategy that takes into account changes in market trends, he said.

“We are proud to have created a product that allows investors to choose not to pay an advisory fee in exchange for the ability to hold a portion of the proceeds in cash and we do not hide the fact that our company generates revenue for the services we provide.” the company said in a statement.

Schwab and other money managers have used cash accounts in recent years to grow their business. Corporate-affiliated banks paid a small interest rate on deposits and earned more than double or even triple that yield by lending funds. The percentage of a particular client’s portfolio held in cash varied depending on how aggressively or cautiously the person wanted to invest, the SEC said.

The SEC said the misconduct occurred from 2015 to 2018. Schwab changed its marketing and regulatory brochures in 2015 after two media articles criticized the cash program as a drag on returns, the SEC said. .

Holding cash is incredibly popular on Wall Street today. This is a big change from the way professional wealth managers have behaved over the past decade. WSJ’s Dion Rabouin explains why cash is no longer junk. Illustration: Adele Morgan

The revised brochures state that the cash rates were set according to a formula that balanced risk tolerance and investment time, according to the SEC. But cash levels were actually set “to meet minimum revenue targets” for Schwab, the regulator said.

Schwab’s latest regulatory brochure for its Intelligent Portfolios product, dated March, states that a customer’s cash allocation will vary from 6% to 30% of an account’s value. The disclosure also notes that the practice may result in “lower overall portfolio performance, for example when other riskier assets exceed liquidity”.

The penalties Schwab agreed to pay include a fine of $ 135 million and approximately $ 51 million in illicit profits that it must repay. The total of $ 186.5 million could go to hurt investors, the SEC said.

As part of the agreement, Schwab has agreed to cooperate with the SEC in related investigations and to hire an independent compliance consultant to review how it ensures that customer information is accurate.

Write to Dave Michaels at [email protected]

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