- The SEC is investigating Charles Schwab’s robo-advisor, the firm disclosed in a filing on Friday.
- The probe, which appears to be the largest for a robo-advisor, underscores the SEC’s priorities.
- The disclosure may point to growing scrutiny around digital advice providers, experts say.
Financial firms braced themselves this spring when the Senate confirmed regulatory veteran Gary Gensler as head of the Securities and Exchange Commission. Investors just caught a glimpse into one of his early priorities as the industry’s top regulator: financial technology and the manifold ways tech is changing how people invest.
The SEC is investigating Charles Schwab’s robo-advisor, the investing giant said in a public filing on Friday. Schwab says the probe stems from a compliance examination and centers on disclosures related to its digital advisory product, which handles some $64 billion in assets as of March.
Schwab said its second-quarter earnings results will show a $200 million charge related to the investigation. The company is cooperating with the SEC, and a Schwab spokesperson declined to comment beyond the filing.
That cost appears to be the largest that a robo-advisor — the automated low- or no-cost investing tools that emerged after the financial crisis — has incurred over a public regulatory matter, experts say.
There is little precedent for such investigations in the relatively young class of digital wealth management products and startups, and it is unclear what spurred the investigation or the reason for it. (The SEC first took enforcement action against robo-advisors in 2018, when it charged Wealthfront and now-shuttered Hedgeable with making false disclosures). The SEC did not return a request for comment.
Still, the probe shows the SEC is taking a closer look than it has in the past at the way digital wealth advisors make money, assess customers’ risk tolerance, and make disclosures, experts say.
Robo-advisors are “in the crosshairs” as regulators examine digital wealth managers that have drawn billions of dollars in recent years, said Andrew Schwartz, analyst with Oliver Wyman’s financial services division, Celent.
“We don’t know the specifics yet, but the bottom line here is the SEC is focusing on it, and I think advisors should be closely paying attention to what the outcome is,” he told Insider Friday.
Analyst says probe could be related to Charles Schwab’s large cash allocation
The investigation may relate to the robo-advisor’s relatively large allocation to cash and how that is disclosed, Credit Suisse analyst Craig Siegenthaler told clients.
Schwab can offer the product for free in part because it earns money on cash it holds in automated portfolios, he noted. It offers two tiers: one charges nothing, and the other connects users with a financial planner for a fee.
“That is the key thing here. Is it suitable, did you disclose it, and how did we disclose it,” said Timothy Welsh, chief executive of wealth management consulting firm Nexus Strategy, referring to the way the robo-advisor decides how to diversify clients’ portfolios and what is suitable for customers.
Welsh, who before forming his consultancy worked at Schwab, said if Gensler is looking to make his mark on the regulator with this investigation and a focus on similar models, “this will do it”.
In May, Gensler noted in a testimony that an array of startups “in wealth management, asset management, and robo-advising” are part of the wider fintech ecosystem. “These new business models and technologies raise a variety of policy questions around gamification, behavioral prompts, the use of data analytics, and more.”
David Goldstone, manager of research and analytics for research firm Backend Benchmarking, said he does not necessarily expect meaningful ripple-effects across the digital wealth space because of the Schwab probe.
“But I think it is a strong reminder that there are conflicts of interest across the industry,” he told Insider. “It is really important that advisors have transparency into what they do, and why they make the decisions they make.”
Leave a Reply
Leave a Reply
This site uses Akismet to reduce spam. Learn how your comment data is processed.
