Charles Schwab is facing a purported class action lawsuit accusing the firm of violating its fiduciary duty in relation to the cash sweep arrangements in its robo-advice offering.
The company allegedly kept clients of Schwab Intelligent Portfolios “over-concentrated in cash during the white-hot boom years of America’s recent stock market,” thereby making them miss out on market gains, because it wanted instead to earn income from their client’s cash, according to a lawsuit filed in U.S. District Court for the Northern District of California last week.
Plaintiffs Lauren Marie Barbiero, a former Schwab client, and Kimberly Jo Lopez and William Kenneth Lopez, who remain clients of the firm, claim that Schwab has earned “at least hundreds of millions of dollars in skimming earned interest” in total from its clients as a result of the cash sweep arrangement, while clients missed out on $531 million in portfolio gains that they would have earned had Schwab invested their cash in fixed-income assets of the type already held in the portfolio.
In explaining why they filed the suit, the plaintiffs quote a Raymond James analyst report published in 2015:
“We now understand why Charles Schwab is so excited about the upcoming launch of Schwab Intelligent Portfolios, the firm’s ‘robo-advisor’ offering that is slated to launch at some point in 1Q15: SIP will allocate between 7% and 30% of client portfolios to cash. By holding such a large percentage of managed account assets in cash that can be swept to its bank, Schwab stands ready to generate substantial revenue from the product despite not charging any advisory fees,” Raymond James wrote on its blog in 2015, according to the suit. “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 suit, which is vying for class action status for all Intelligent Portfolios account holders during the past four years, seeks to enjoin Schwab from engaging in the allegedly wrongful business practices, as well as restitution, disgorgement of the allegedly ill-gotten profits, damages, lawyers’ fees and costs and any relief deemed appropriate by the court.
A Schwab spokeswoman tells FA-IQ that the company doesn’t comment on active litigation.
— With additional reporting from Sam Del Rowe
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