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Schwab (SCHW) Robo-Advisor Business' Legal Woes Continue

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Charles Schwab SCHW has been slapped with a class-action lawsuit over violations of its fiduciary duty by placing its own interest before the protection of its clients through its robo-adviser Schwab Intelligent Portfolios’ (SIP) cash sweep program. The case, filed in the U.S. District Court in Northern California on Friday, also accused the company of breach of contract and violation of state laws.

Following the revelation of this lawsuit, shares of the company declined 3%.

The lawsuit alleged that Charles Schwab Investment Advisory, a Schwab subsidiary that manages SIP, placed its and the company’s interest before that of its customers by over-allocating cash in SIP program accounts as compared with other assets. This bolstered the company’s interest income, while the clients lost hundreds of millions in potential gains.

Unlike other robo-advisor peers that charge annual/monthly fees, Schwab charges no advisory fees. The company generates much of its revenues from net interest margin on cash sweeps into Charles Schwab Bank. Per the lawsuit, the company allocates 6-30% of client assets in its SIP cash sweep program and customers can’t opt out of it.

The lawsuit, further, added, “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.”

Robo-advisors are becoming increasingly popular among Wall Street firms. In June, JPMorgan JPM acquired one of the U.K.’s largest robo advisory firms, Nutmeg. Also, Goldman Sachs GS rolled out its robo-advisor service — Marcus Invest — earlier this year. Even Citigroup C had unveiled a robo-advisor service in 2020 for clients with at least $50,000 at the bank.

The current lawsuit comes more than two months after Schwab had disclosed a probe by the Securities and Exchange Commission into the SIP. Given the development, the company had incurred a “non-deductible charge of $200 million” in second-quarter 2021, while noting that the actual “liability” might be different, “depending on the outcome of the matter.”

Over the past year, shares of Schwab have surged 95.2%, outperforming the industry’s rally of 85.6%.

Zacks Investment Research
Zacks Investment Research


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Currently, Schwab carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


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