(Reuters) – The US Securities and Exchange Commission said on Monday that it charged three Charles Schwab Corp. investment advisers’ subsidiaries for failing to disclose less profitable fund allocations and misleading their clients with robo-advisors.
Without acknowledging or denying the SEC’s allegations, the subsidiaries will pay $ 187 million to settle the allegations, the SEC said in its order.
From March 2015 to November 2018, Schwab said that its robo-advisors would seek “optimal returns” for investors, while the real estate agency’s own data actually showed that under most market conditions, the cash in the portfolios would make clients make less money even while they take the same risk, the SEC found.
Schwab had no immediate response to a request for comment.
The Texas-based company announced that the robo-advisor had neither advisory nor hidden fees, but did not tell clients about this cash burden on their investment. In turn, it made money on the cash allocations in the robo-advisor̵7;s portfolios by sweeping the money to its subsidiary bank, lending it and then keeping the difference between the interest it earned on the loans and what it paid in interest to robo-advisor clients, the SEC said.
“Schwab claimed that the amount of cash in its robo-advisers ‘portfolios was determined by sophisticated financial algorithms designed to optimize their clients’ returns when it was in fact determined by how much money the company wanted to make,” said Gurbir Grewal, SEC supervisor.
“Schwab’s behavior was extreme and today’s actions send a clear message to advisers that they must be transparent with customers about hidden fees and how such fees affect customers’ returns.”
The SEC’s order comes when Wall Street’s watchdog has intensified scrutiny of brokerage firms’ use of robo-advisors and the often misleading returns to investors about returns. It has also issued a series of regulatory proposals aimed at increasing investor disclosure, including one on digital engagement methods, among others.