What You Need to Know
- In ads and Form ADV filings, Schwab claimed its Intelligent Portfolios platform had 'no hidden fees [and] no advisory fees.'
- The SEC found these statements misleading, saying high cash allocations in the portfolios reduced returns while making money for Schwab.
- The fine was announced days after a judge dismissed a class-action lawsuit alleging that SIP over-invested clients in cash.
The Securities and Exchange Commission on Monday ordered Charles Schwab to pay $186.5 million related to false and misleading statements made by its subsidiaries in their Form ADV filings and in advertising about the cash component of Schwab’s robo-advisor service, Schwab Intelligent Portfolios.
According to the SEC order, from March 2015 through November 2018, certain investment advisor subsidiaries of The Charles Schwab Corp. made false and misleading statements in their Form ADV filings about the cash component of Schwab Intelligent Portfolios (SIP).
The subsidiaries also published misleading advertisements about SIP.
The SEC order comes on the heels of June 7 ruling by a Northern California District Court judge dismissing a class-action lawsuit that alleged SIP violated its fiduciary duty by over-investing clients in cash.
Starting around the time of the SIP launch in March 2015, Schwab published advertisements stating that there were “no hidden fees [and] no advisory fees” for SIP, the order states.
“These statements were misleading because, based on Schwab’s own internal models, the cash allocations in SIP would, when other assets such as equities outperform cash, reduce investors’ returns by approximately as much as advisory fees would have,” according to the order.
Certain other advertisements were misleading “because they implied that SIP investors would end up with more money as a result of not being charged an advisory fee—even though internal models showed that the cash allocations would reduce returns by a similar amount when other assets such as equities outperform cash,” the SEC said.
Popular advisor and blogger Michael Kitces tweeted: “This is really a HUGE fine for Schwab. To put $187M in context, most robos only generate ~0.25% in fees. So that’s the equivalent of 100% of revenue on ~$75B(!) of robo-AUM. If their profit margin is 20%, that fine is equal to 100% of profits on $375B of robo-AUM. WOW.”
According to the order, each of SIP’s model portfolios held between 6% and 29.4% of clients’ assets in cash.
“The amount of cash that each SIP model portfolio contained was pre-set so that Respondents’ affiliate bank would earn at least a minimum amount of revenue from the spread on the cash by loaning out the money,” the SEC said.