Charles Schwab might owe you money in SEC lawsuit settlement

Investment giant Charles Schwab has agreed to pay out $187 million to clients who used its robo-advisor products in order to settle an investigation into the matter by the Securities and Exchange Commission. Here’s what you need to know:

  • What was Charles Schwab alleged to have done? The SEC says the company misled investors who used its robo-advisor product, called Schwab Intelligent Portfolios (SIP). The SEC says Schwab’s SIP product was advertised that it would seek “optimal return[s]” for clients, but that Schwab used the client’s cash in a way that was less optimal when it came to returns. The SEC says Schwab used the client’s cash to loan out through its affiliate bank, “keeping the difference between the interest it earned on the loans and what it paid in interest to the robo-adviser clients.”
  • What does the SEC say about the matter? As Gurbir S. Grewal, director of the SEC’s Division of Enforcement put it, “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. 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.”
  • What does Charles Schwab say about the matter? In its settlement with the SEC, Schwab says it “neither admits nor denies the allegations” made. Why settle then? “We believe resolving the matter in this way is in the best interests of our clients, company, and stockholders as it allows us to remain focused on helping our clients invest for the future,” the company said. “As always, we are committed to earning our clients’ trust every day and work diligently to maintain the highest standards for professional conduct throughout our organization.”
  • So how much will Charles Schwab have to pay out to affected clients? The company will pay a $135 million civil penalty in addition to a $52 million payment covering disgorgement and prejudgment interest. That a total $187 million.
  • Who gets the payout and how much do they get? Clients who used the company’s Schwab Intelligent Portfolios between March 2015 and November 2018 are eligible for a payout, but it’s not been made clear what, if any, other conditions must be met. It’s also not yet clear how much of a payout each client will get. Payouts will likely be determined on an individual client basis. All Schwab has said, for now, is that settlement funds “will be deposited into a Fair Fund account for distribution to affected investors.”

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