Schwab DAF Charitable Fund Breach of Fiduciary Duties Class Action

This class action involves the Schwab donor-advised fund (DAF), a charitable entity that is part of the Schwab Charitable Fund. The complaint alleges that Schwab Charitable, the Schwab Board of Directors, and the Schwab Charitable Investment Oversight Committee have breached their fiduciary duties to the Schwab DAF, in violation of common law as well as a California law, the Uniform Prudent Management of Institutional Funds Act (UPMIFA).

The class for this action is all account holders of Schwab Charitable Donor-Advised Fund accounts with a balance in an investment poof at any time on or after October 30, 2016, not including members of the defendants or other employees with responsibility for the DAF’s investment or administrative functions.

The complaint claims that DAFs are “a less administratively burdensome alternative to a private foundation” that allow persons to donate money but still retain certain advantages, such as delaying the actual donation of the assets and still earn income on those assets. The nonprofit DAF takes legal title to the assets, but the donors direct how the funds are invested and distributed.

DAFs pay two types of expenses. First, they pay an administrative fee for the operation of the accounts and processing of donations. Second, when the assets are invested in one or more “pooled investment vehicles,” they pay an investment management fee. Each of these fees are calculated as a percentage of assets.

California law requires that the directors of a DAF perform the fiduciary duties of care and loyalty.

The original contributions to establish the Schwab DAF came from the Charles Schwab Corporation. The complaint says the relationship between the entities is close, despite the fact that they are separate legal entities.

The result, the complaint alleges, “is that Schwab Charitable does not act independently, with a sole focus on advancing its charitable purpose, but instead has helped maximize the profits of the Schwab Corporation by making imprudent investment decisions and paying grossly excessive administrative fees for the benefit of Schwab Corporation.” These actions take away from the DAF and reduce its ability to fund charitable purposes.

How does this come about? The complaint claims that, of its fourteen investment choices, thirteen “do not reflect the purchasing power possessed by one of the nation’s largest charities. Instead, they benefit the Schwab Corporation.” This is because the investment options are all affiliated with Schwab; some, the complaint says, are “uncompetitive” and in many cases “lower-cost and better-performing alternatives” are available through other companies.

According to the complaint, this results “in higher fees paid to Schwab Corporation and lower investment returns” as well as “excessive administrative fees to Schwab Corporation” that could have been lower if there had been an arm’s-length negotiation.

The complaint says that “all of the additional fees paid by donors for the more expensive version of these funds ended up in the pockets of Schwab Corporation.

Article Type: Lawsuit
Topic: Investments
Tags: Breach of Fiduciary Duty, Charitable Organization or Foundation or Similar, Excessive Fees, Investment Performance