Charles Schwab Earnings from Intelligent Portfolios Program Class Action

Digital programs are increasingly used to automate everything. This class action brings suit against Charles Schwab Investment Advisory, Inc. over its digitized investment-advice “robo-advisor” program Schwab Intelligent Portfolios (SIP program). The complaint alleges that, while the SIP program advertises itself as being lower-cost than other programs in certain ways, it involves “self-dealing” by the company that earns it considerable amounts.

The class for this action is all Schwab Intelligent Portfolio account holders between September 10, 2017 and the date of trial in this case.

Robo-advisory programs offer small investors programs to provide financial advice or manage investments with very little human intervention. Investors fill out a questionnaire about their risk tolerance, time frame for investing, financial situation, and financial goals. Some also take into consideration more in-depth information, such as financial transactions, using artificial intelligence tools. The robo-advisor tool then constructs a portfolio allocating assets appropriately, using things like exchange-traded funds (ETFs).

Investors do pay for robo-advisors, via monthly or yearly fees. But the SIP program earns income for Schwab a different way.

Scwab advertises that it has a “commitment to keeping costs low.” Its website promises investors will “[p]ay no advisory fee and no commissions.” But it also notes, “Based on your risk profile, a portion of your portfolio is placed in an FDIC-insured deposit at Schwab Bank.
Some cash alternatives outside of the program pay a higher yield.”

The complaint charges that Schwab makes money out of its investors in at least two ways. It quotes a Raymond James 2015 analyst report on these as saying, “First, some portion of client portfolios may be invested in Schwab ETFs, from which Schwab will earn management fees. Second, Schwab will sweep the cash allocation of client managed accounts into Schwab Bank and earn a net interest margin on this cash. We believe the second revenue source is likely to be much greater than the first and Schwab’s regulatory filings indicate the same…”

The subject of this class action are what the complaint calls these “undeclared fees.”

The amount the SIP program sweeps into cash deposits ranges from 7% to 30%. The complaint quotes again from the Raymond James report as saying, “We now understand why Charles Schwab is so excited about the upcoming launch of” its SIP program. The large percentages of cash swept into its bank mean that Schwab will “generate substantial revenue from the product despite not charging any advisory fees. From the client’s perspective, however, the potential performance drag from such a high cash allocation may easily exceed the management fee savings relative to competitors.”

The complaint alleges that the cash sweeps earn Schwab “at least hundreds of millions of dollars in skimming earned interest … away from [the] linked cash accounts” of the investors and cost them more than half a billion dollars in portfolio growth.

Article Type: Lawsuit
Topic: Investments
Tags: Breach of Contract, Breach of Fiduciary Duty, Investments, Negligent Misrepresentation