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Charles Schwab was fined $186 million by the SEC for misleading clients about its robo-advisory services.
According to the SEC order, between March 2015 and November 2018 certain Charles Schwab subsidiaries made false and misleading claims by touting the benefits of its low-fee services, but failing to adequately disclose the risks associated with the large cash allocations along with the material conflict of interest accrued by Schwab in its cash management strategy.
The SEC considered the statements misleading as it gave the false impression to investors that the services would create a strong competitive advantage over other robo-advisers and falsely implied that the investors would keep more of their money through Schwab’s low-fee services. The disclaimers did not provide enough information that part of the investment would be maintained in cash, which investors could not opt out of it, and the account cash allocations were likely to underperform when compared with other available alternative investments. The SEC found that Schwab’s own internal models show that the cash allocation would reduce return and would be less profitable for their clients under most market conditions. In contrast, Schwab’s cash management strategy allowed it to accrue interest on the cash allocations, but failed to pass that interest on to its clients.
As result, those investments “imprudently over-allocated to cash for Charles Schwab’s own financial interest” were substantially harmful to investors. Accordingly, the purported benefits of the low fees approach did not result in any additional advantage to investors regarding the cash drag on their investment.
The SEC concluded that the schedule of fees, risks and disclosures should have clear and complete information in order for clients to make informed decisions. In order to avoid similar actions by the SEC, firms should review their Form ADV and client facing documentation at least once a year to ensure all material risks and facts are disclosed.
How we can help
Firms should review the accuracy of their Form ADV at least once a year to make sure they have provided clear and accurate information to their clients and disclosed all material risks and conflicts of interest.
Bovill can assist with Form ADV reviews and updates as part of your annual compliance review required by the Investment Advisers Act of 1940.
We can also offer extensive marketing material review and support, including a suite of training sessions on the new adviser marketing rules that will become mandatory in November 2022.
