Schwab Hit With Class Action Claim Over Robo Cash Sweeps
A group of investors have brought a proposed class action claim against a Charles Schwab Corp. subsidiary over allegations it over-allocated customers of its robo-advisor Schwab Intelligent Portfolios to cash, bolstering the retail brokerage’s income while costing investors hundreds of millions in potential gains.
“CSIA systematically kept the ‘Intelligent Portfolios’ accounts of Plaintiffs and the proposed Class over-concentrated in cash during the white-hot boom years of America’s recent stock market,” the complaint said.
A spokeswoman for San Francisco-based Schwab declined to comment.
The lawsuit comes on the heels of Schwab’s July report that it took a $200 million charge in the second quarter pertaining to an ongoing probe by the Securities and Exchange Commission that “largely concerns historic disclosures” relating to Schwab Intelligent Portfolios, according to a filing. The unit managed nearly $64 billion in customer assets at the end of March, up 51% year-over-year, the company said in the filing.
Schwab, unlike its many robo competitors that charge annual fees based on account balance or flat monthly fees, charges no advisory fees or commissions, and derives much of its revenue from net interest margin on cash sweeps into Charles Schwab Bank, according to the complaint.
It allocates between 6% to 30% of customer assets to Schwab’s cash sweep program, depending on the investment strategy the client selects, their risk tolerance and time horizon, according to the complaint, which also said customers can’t opt out of the program.
“While Schwab indeed charges its retail investor clients no investment advisory fees in connection with the SIP Program, the program is not free for anyone to use, as certain Program marketing suggests,” the class action complaint said.
A smaller share of revenue comes from a portion of client portfolios that may be invested in Schwab exchange-traded funds (ETFs), from which the company earns management fees, according to the complaint.
The named plaintiffs, Lauren M. Barbiero, of Terrytown, Louisiana, and Kimberly J. Lopez and William K. Lopez of Walden, New York, opened Intelligent Portfolios accounts with Schwab in March 2019, April 2019 and October 2020, respectively. Barbiero closed her account in March 2020, the same month the market plummeted from widespread shutdowns caused by the Covid-19 pandemic, but Kimberly Lopez and William Lopex have remained customers of the program.
The plaintiff Barbiero’s Intelligent Portfolios account was to be used for saving for her minor son, which the complaint said should have called for taking on more risk in the portfolio.
“Despite the extensive investment horizon associated with Plaintiff Barbiero’s SIP Program account, CSIA kept Plaintiff Barbiero’s Schwab account invested in approximately 10% or more in cash,” the complaint said. “This, under these circumstances, is an imprudently high cash allocation for a savings account of a beneficiary/client like Plaintiff Barbiero’s son, who is under 21 years of age.”
Amounts invested with Schwab by each of the named plaintiffs were not disclosed, although the complaint indicates they had as low as 9% and as high as 25% of their balances allocated to cash in any given month they maintained their accounts.
In calculating the opportunity-cost of the sweep, the complaint cited an August report from Backend Benchmarking that found Schwab Intelligent Portfolios customers would have earned another 2%–or $531 million collectively–if Schwab had charged a 0.30% management fee and invested the cash allocation into the same fixed-income assets that are held in the portfolio.
Backend Benchmarking, which publishes a quarterly report on robo-advisor performance, based the simulated portfolio return on the equity-only and fixed income-only returns of its Schwab Intelligent Portfolio account, invested in a moderately aggressive portfolio, according to the report.
The plaintiffs’ lead attorney John T. Jasnoch, of law firm Scott + Scott, declined to comment beyond the filing.