Schwab Sends Settlement Checks to Robo-Advisor Clients

 

What You Need to Know

  • The checks, which must be cashed or deposited by March 30, are tied to a a $186.5 million settlement over cash in Schwab Intelligent Portfolios.

  • Clients should be aware of possible tax implications from the checks.

  • If funds were in a qualified account, clients were told, it’s best to deposit the check in the same account type.

Eligible Charles Schwab & Co. clients received checks recently in connection with a $186.5 million settlement with the Securities and Exchange Commission over allegations that firm subsidiaries had misled clients about the cash components of its robo-advisor offering, Schwab Intelligent Portfolios (SIP).

A client’s check may create a taxable event, depending on the account type it’s connected to and where the client deposits it, according to the fund administrator working with Schwab.

As part of the settlement in 2022, the SEC ordered Schwab to pay about $52 million in disgorgement and prejudgment interest and a $135 million civil penalty, without admitting or denying the agency’s findings that certain firm subsidiaries had made false and misleading statements from March 2015 through November 2018.

“A letter was mailed to all eligible clients on December 30, 2022, on behalf of Charles Schwab & Co. Inc., with a check,” a fund administrator website established to provide information about the distribution reported that day.

All the checks have been mailed, a Schwab spokesperson said Tuesday.

Eligible clients who held a SIP account between March 2015 and November 2018 and who were entitled using the calculation methodology approved by the SEC to a distribution of $5 or more per affected account will receive a check, according to the site.

“If you received a check, this is a real check and, depending on your personal circumstances, you should deposit or cash it promptly before its expiration on March 30, 2023 or you will forfeit this distribution amount,” the site says.

Clients who held a qualified SIP account, such as an IRA, “should strongly consider depositing the check into another qualified account to avoid any potential adverse tax consequences,” according to the site, which added that neither the firm nor the fund administrator provides tax advice, “so you should consult with a tax professional if you have questions about any possible tax consequences of the distribution.”

Information on the type of qualified account the distribution was based on can be found in the payee line of the check or by contacting the fund administrator.

If the distribution is related to a non qualified account, such as a taxable brokerage account, it may be taxable and the client may receive an IRS Form 1099.

One client told Barron’s that he and his wife had received checks amounting to $1,873.

The SEC last year said that during the time covered in the order, Schwab’s mandated disclosures stated that the amount of cash in the robo-advisor portfolios was determined through a “disciplined portfolio construction methodology,” and that the robo-advisor would seek “optimal” returns.

“In reality, Schwab’s own data showed that under most market conditions, the cash in the portfolios would cause clients to make less money even while taking on the same amount of risk,” the SEC said in a statement in June. “Schwab advertised the robo-advisor as having neither advisory nor hidden fees, but didn’t tell clients about this cash drag on their investment.”

David Goldstone, investment research manager at Condor Wealth Management, which publishes the Robo Report and Robo Ranking, said Tuesday:

“Schwab is sending checks as a result of misleading customers about the high cash allocations in its robo product. Schwab now clearly discloses the high cash allocations in the Intelligent Portfolios accounts and that this cash helps generate revenues for the product. Unfortunately, the high cash allocations remain an integral part of the product, and increased disclosures will not remove the cash drag on portfolio performance.”

Cash in the portfolios currently averages 10%, according to the Schwab spokesperson.

In a statement about the settlement in June, the firm said:

“We believe resolving the matter in this way is in the best interests of our clients, company and stockholders as it allows us to remain focused on helping our clients invest for the future. As always, we are committed to earning our clients’ trust every day and work diligently to maintain the highest standards for professional conduct throughout our organization.”