Charles Schwab has paid more than $ 186 million for his Robo-Adviser business

WASHINGTON— Charles Schwab SCHW – 3.18%

& Co. Inc. will pay more than $ 186 million to fix a regulatory investigation that has failed to properly disclose how keeping a large portion of its clients ’assets in cash could harm their investment returns.

The Securities and Exchange Commission said Schwab’s robbery advisory portfolio held between 6% and 29.4% of its assets in cash, rather than investing money in stocks or other securities. The practice made money for the Schwab-affiliated bank, which provided the cash, and the investment adviser made “false and misleading statements” in the regulatory brochure on the conflict of interest, the SEC said in a liquidation order.

“Schwab said the amount of money in its robo-advisory portfolio was decided through sophisticated economic algorithms aimed at optimizing customer profits, when in reality it was decided how much money the company wanted to make,” said Gurbir S, chief executive of SEC. Grewal.

Schwab agreed to resolve the investigation and pay the fines without admitting or denying the misconduct. Schwab did not charge customers for the uninvested portion of their assets, which Schwab marketed as an advantage because customers would save more of their money, the SEC said.

Schwab announced last year that it would pay about $ 200 million to fix research on its Schwab Intelligent Portfolios, a robot consultant product that chose a mix of exchange-traded funds and customer allocation.

Schwab said Monday that its robot consultant product remains an important tool for customers. And money remains a key part of a diversified investment strategy that embraces changes in market trends, he said.

“We are proud to have built a product that allows investors to choose not to pay advisory fees in exchange for allowing them to have a portion of their profits in cash, and we do not hide the fact that our company generates revenue from services,” the company said in a statement.

Schwab and other money managers have used cash accounts in recent years to promote their business. Business affiliated banks paid a low interest rate on deposits, earning more than double or triple that profit by lending funds. The percentage of a particular client’s portfolio varied in cash depending on the aggressive or conservative way that person wanted to invest, the SEC said.

The SEC said the misconduct occurred between 2015 and 2018. Schwab changed its marketing and regulatory brochures in 2015 after criticizing articles in both media as a drag on the return of money, the SEC said.

Having money is very popular on Wall Street today. It’s a big change from the behavior of professional asset managers over the last decade. Dion Rabouin of the WSJ explains why money is no longer rubbish. Illustration: Adele Morgan

The revised brochures said the cash percentage was set according to a formula that balanced risk tolerance and investment time, according to the SEC. But the regulator said the levels were set for Schwab to “achieve the minimum income targets”.

Schwab’s latest regulatory brochure for its Intelligent Portfolios product in March states that a customer’s cash allocation will range from 6% to 30% of the value of an account. The disclosure also says the practice could have a “lower overall portfolio performance,” for example, when other more risky assets outperform the money.

Among the penalties Schwab agreed to pay were a $ 135 million fine and a return of about $ 51 million in profits. A total of $ 186.5 million could be allocated to affected investors, the SEC said.

As part of the settlement, Schwab agreed to cooperate with the SEC in related investigations and to hire an independent compliance consultant to investigate how accurate customer disclosures are being made.

Write Dave Michaels at [email protected]

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