Charles Schwab said it will take a $200 million charge in the second quarter related to an SEC probe of its robo advisor platform.
The compliance inquiry relates to past disclosures around Schwab’s Intelligent Portfolios product, according to a regulatory filing. The company said it’s been cooperating with the SEC and its ultimate liability may differ from the amount it’s earmarking now.
The SEC filed its first enforcement actions against robo advisors in December 2018, accusing Wealthfront and another firm of making false statements about investment products and publishing misleading advertisements. Wealthfront, which had more than $11 billion in client assets under management at the time, agreed to pay a $250,000 penalty without admitting or denying the findings.
Robo advisors, which typically select low-cost ETFs for investors based on their risk tolerance and automatically rebalance the portfolios, have become increasingly popular across Wall Street, with Goldman Sachs rolling out such a product earlier this year. On its website, Schwab predicts assets managed by robo-advisors will grow to $460 billion next year, from $47.3 billion in 2015.
While the SEC has signaled it’s more focused on cases against robo advisors, it has brought relatively few cases. Last month, the agency settled claims against a Canadian robo-advisor, Emperor Investments, after the firm agreed to pay $25,000 over allegations it posted misleading performance data on its website.
The SEC didn’t immediately respond to an email about the Schwab case.
SEC Guidance
Schwab said it had $64 billion in client assets in its robo advisor product at the end of March. The firm has more than $7 trillion in total client assets across 32 million active brokerage accounts.
Under U.S. securities rules, firms that offer advice to clients digitally are required to make the same kind of disclosures as those whose representatives make suggestions to clients over the phone or in person. The SEC put out guidance in February 2017 that detailed how its rules apply to the fast-growing industry, reminding firms to be careful not to mislead clients, to ensure disclosures are accurate and that internal compliance programs are effective.
SEC Chair Gary Gensler, who took over the regulator in April, has signaled that he wants the agency to hold robo advisors to the same standards as other investment firms.
“Technology is always changing the face of finance,” Gensler said last month during City & Financial Global’s London City Week event. “But our core principles stay the same: protecting investors, facilitating capital formation for individuals and companies and maintaining fair, orderly and efficient markets between them.”
—Additional reporting by Michael J. Moore and Jesse Westbrook.
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