Schwab to Pay $187 Million for Misleading Robo-Advisor Clients — Oblivious Investor


Several years ago when Schwab first announced their “Intelligent Portfolios” robo-advisor platform, there was a ton of press coverage, for one major reason: there were no fees other than the fees of the funds.

But once Schwab actually made the program available and people could see the portfolios created, there was one question that struck me as well as many other people: why’s there so much cash? Even for a retirement account for a young investor requesting an “aggressive growth” allocation, there was still a significant allocation to cash.

Here’s how the SEC explains what was going on:

Schwab’s own data showed that under most market conditions, the cash in the portfolios would cause clients to make less money even while taking on the same amount of risk. Schwab advertised the robo-adviser as having neither advisory nor hidden fees, but didn’t tell clients about this cash drag on their investment.

Schwab made money from the cash allocations in the robo-adviser portfolios by sweeping the cash to its affiliate bank, loaning it out, and then keeping the difference between the interest it earned on the loans and what it paid in interest to the robo-adviser clients.

So now Schwab has to pay $187 million back to clients who were harmed.

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