Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

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TXGator
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Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by TXGator »

The cash-holding component generated a lot discussion on this board - more than just posters here were questioning this as a disguised AUM fee

https://www.wsj.com/articles/charles-sc ... _lead_pos7

(Apologizes on if I post the link incorrectly)
billaster
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by billaster »

This is exactly the business Vanguard is attempting to get into with their new FDIC sweep accounts.

Schwab "made money from the cash allocations in the robo-adviser portfolios by sweeping the cash to its affiliate bank, loaning it out, and then keeping the difference between the interest it earned on the loans and what it paid in interest to the robo-adviser clients."

Vanguard's affiliate banks are Valley National Bank and NexBank. Vanguard can earn a lot more on the spread between interest on loans and interest paid on deposits than it earns by assets under management.

For example, Vanguard has over $300 billion in its just its retail money market sweep accounts. It earns 0.10% in fees on these assets, $0.3 billion per year.

If instead, Vanguard could put the $300 billion in FDIC accounts and earn just 1% on the spread, it would rake in $3 billion a year, 10 times as much.
richard.h.gao
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by richard.h.gao »

Schwab also charges you $25 to transfer your assets out, per asset, in addition to a $50 transfer fee. I'm never going back to Schwab nor will I ever buy any Schwab ETFs or mutual funds.
loghound
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by loghound »

This is really unfortunate, I have a modest amount of money I put into one of their 'intelligent portfolios' as an experiment (I was sort of curious on how it would work) and mostly I was happy -- it did a good job tax loss harvesting and seemed to keep balanced -- My one frustration was how much cash it kept.

On a possibly related note it (seems?) like it's gotten much more aggressive spending the cash down in the last few months (possibly as a result of this charge)
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RonSea
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by RonSea »

richard.h.gao wrote: Mon Jun 13, 2022 12:43 pm Schwab also charges you $25 to transfer your assets out, per asset, in addition to a $50 transfer fee. I'm never going back to Schwab nor will I ever buy any Schwab ETFs or mutual funds.
It's $50 transfer fee for an entire account OR $25 per asset. I just transferred out of Schwab to BoA (for their platinum honors rewards program) and was only charged $50. Well I think I was charged $50 twice, once for my personal and once for my IRA.
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by rich126 »

Not surprising.
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by Granger »

Will Schwab robo-advised clients reap any of the benefit of this settlement?

Silly question, probably.
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by galawdawg »

richard.h.gao wrote: Mon Jun 13, 2022 12:43 pm Schwab also charges you $25 to transfer your assets out, per asset, in addition to a $50 transfer fee.
Simply not true.
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by richard.h.gao »

RonSea wrote: Mon Jun 13, 2022 1:31 pm
richard.h.gao wrote: Mon Jun 13, 2022 12:43 pm Schwab also charges you $25 to transfer your assets out, per asset, in addition to a $50 transfer fee. I'm never going back to Schwab nor will I ever buy any Schwab ETFs or mutual funds.
It's $50 transfer fee for an entire account OR $25 per asset. I just transferred out of Schwab to BoA (for their platinum honors rewards program) and was only charged $50. Well I think I was charged $50 twice, once for my personal and once for my IRA.
I got charged both. 10 ETFs = (10 x $25) + $50 = $300 to transfer out.
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by richard.h.gao »

galawdawg wrote: Mon Jun 13, 2022 3:52 pm
richard.h.gao wrote: Mon Jun 13, 2022 12:43 pm Schwab also charges you $25 to transfer your assets out, per asset, in addition to a $50 transfer fee.
Simply not true.
It is true. They consider selling fractional shares a broker assisted trade.
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by indexfundfan »

richard.h.gao wrote: Mon Jun 13, 2022 4:00 pm
galawdawg wrote: Mon Jun 13, 2022 3:52 pm
richard.h.gao wrote: Mon Jun 13, 2022 12:43 pm Schwab also charges you $25 to transfer your assets out, per asset, in addition to a $50 transfer fee.
Simply not true.
It is true. They consider selling fractional shares a broker assisted trade.
Wow, this is the first time I'm hearing this.

I know this is hindsight now, but would it have been possible for you to sell the fractional shares first before requesting the transfer?
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richard.h.gao
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by richard.h.gao »

indexfundfan wrote: Mon Jun 13, 2022 4:03 pm I know this is hindsight now, but would it have been possible for you to sell the fractional shares first before requesting the transfer?
I think that could have avoided the issue.
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by Nate79 »

richard.h.gao wrote: Mon Jun 13, 2022 4:05 pm
indexfundfan wrote: Mon Jun 13, 2022 4:03 pm I know this is hindsight now, but would it have been possible for you to sell the fractional shares first before requesting the transfer?
I think that could have avoided the issue.
I do not know what triggered your fees but from your other thread Schwab reversed the charges. You failed to mention that detail. And Schwab does not charge to transfer shares in kind except the account fee. And that includes fractional shares.
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by galawdawg »

richard.h.gao wrote: Mon Jun 13, 2022 4:00 pm
galawdawg wrote: Mon Jun 13, 2022 3:52 pm
richard.h.gao wrote: Mon Jun 13, 2022 12:43 pm Schwab also charges you $25 to transfer your assets out, per asset, in addition to a $50 transfer fee.
Simply not true.
It is true. They consider selling fractional shares a broker assisted trade.
Interesting as that is not what you reported in your previous post on the issue:
richard.h.gao wrote: Wed May 18, 2022 10:45 pm Level 1 support said it was exchange fees. Level 2 support had no idea what it was and reversed the charges, so can't screenshot anymore.
While there was speculation on the part of several what you might have seen in the transaction history, Schwab has stated that they do NOT charge a "broker assisted trade" to liquidate partial ETFs during an ACATS transfer out.

It is a disservice to other Bogleheads to falsely state something as fact based merely upon your single anecdotal experience that may have been an error or technical glitch during your particular ACATS transfer. Could an error have occurred...certainly. No person or business is perfect. Were you satisfied with your experience with Schwab? Obviously not. However, does Schwab charge "$25 to transfer your assets out, per asset, in addition to a $50 transfer fee" as you claim. No.
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by toddthebod »

galawdawg wrote: Mon Jun 13, 2022 4:35 pm
richard.h.gao wrote: Mon Jun 13, 2022 4:00 pm
galawdawg wrote: Mon Jun 13, 2022 3:52 pm
richard.h.gao wrote: Mon Jun 13, 2022 12:43 pm Schwab also charges you $25 to transfer your assets out, per asset, in addition to a $50 transfer fee.
Simply not true.
It is true. They consider selling fractional shares a broker assisted trade.
Interesting as that is not what you reported in your previous post on the issue:
richard.h.gao wrote: Wed May 18, 2022 10:45 pm Level 1 support said it was exchange fees. Level 2 support had no idea what it was and reversed the charges, so can't screenshot anymore.
While there was speculation on the part of several what you might have seen in the transaction history, Schwab has stated that they do NOT charge a "broker assisted trade" to liquidate partial ETFs during an ACATS transfer out.

It is a disservice to other Bogleheads to falsely state something as fact based merely upon your single anecdotal experience that may have been an error or technical glitch during your particular ACATS transfer. Could an error have occurred...certainly. No person or business is perfect. Were you satisfied with your experience with Schwab? Obviously not. However, does Schwab charge "$25 to transfer your assets out, per asset, in addition to a $50 transfer fee" as you claim. No.
Since I'm the one who started the speculation on the previous thread (based on the only $25 fee on the Schwab fee list (https://www.schwab.com/pricing) being for broker-assisted trades), let me speculate anew: Schwab also charges $25 for partial ACAT transfers. ACAT transfers are initiated from the receiving end. I bet this guy listed his ETFs on his transfer form instead of just checking the full transfer box, so the receiving broker executed individual partial transfers for each ETF.

Regardless, the point that you are correctly making is that whoever made a mistake here, nobody actually had to pay $25 for each position that was transferred in the end, and among the tens of thousands of users on this forum, I've never seen anyone else experience something similar.
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by Lyrrad »

Granger wrote: Mon Jun 13, 2022 3:35 pm Will Schwab robo-advised clients reap any of the benefit of this settlement?

Silly question, probably.
Yes. It seems that there will be compensation due to investors that invested from March 2015 through November 2018, the period during which the SEC alleged Schwab subsidiaries had misleading marketing about the purpose and benefits of the cash allocations.

According to the WSJ article, the SEC alleged that Schwab subsidiaries marketed the cash allocations in those portfolios during that period "according to a formula that balanced risk tolerance and investing time frame", but were really set "to reach minimum revenue targets".

So, the issue doesn't appear that the large cash allocation may be a bad idea for returns, or that Schwab was earning significant revenue from it, but rather that the SEC allegation that Schwab subsidiaries were being misleading about the purpose of the cash allocation.

The SEC press release is here: https://www.sec.gov/news/press-release/2022-104.
SEC Press Release wrote:The subsidiaries agreed to pay $187 million to harmed clients to settle the charges.
SEC Press Release wrote:According to the SEC’s order, from March 2015 through November 2018, Schwab’s mandated disclosures for its robo-adviser product, Schwab Intelligent Portfolios, stated that the amount of cash in the robo-adviser portfolios was determined through a “disciplined portfolio construction methodology,” and that the robo-adviser would seek “optimal return[ s ].” 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. Schwab advertised the robo-adviser as having neither advisory nor hidden fees, but didn’t tell clients about this cash drag on their investment.

Schwab made money from the cash allocations in the robo-adviser portfolios by sweeping the cash to its affiliate bank, loaning it out, and then keeping the difference between the interest it earned on the loans and what it paid in interest to the robo-adviser clients.

"Schwab claimed that the amount of cash in its robo-adviser portfolios was decided by sophisticated economic algorithms meant to optimize its clients’ returns when in reality it was decided by how much money the company wanted to make," said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. "Schwab’s conduct was egregious and today’s action sends a clear message to advisers that they need to be transparent with clients about hidden fees and how such fees affect clients’ returns."
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by MrJedi »

Makes me think about the Ally robo service that claims no fees but requires a 30% cash allocation. I have to believe they are pocketing some type of interest rate spread on that cash allocation but saying their service has no fees.
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by typical.investor »

Lyrrad wrote: Mon Jun 13, 2022 6:45 pm So, the issue doesn't appear that the large cash allocation may be a bad idea for returns, or that Schwab was earning significant revenue from it, but rather that the SEC allegation that Schwab subsidiaries were being misleading about the purpose of the cash allocation.
Ironically per the RoboReport which looks at virtually all robo-advisors, Schwab's fixed income including the cash allocation had the best 1, 3, and 5 year returns.

The Schwab tilt towards small value and it's international holdings were far more detrimental to portfolio value relative.

It's good to see them called out on any previous misleading claims, but it's hard to see how yield farming in the DeFi space isn't an “investment contract” that make them regulated securities and why there is such little concern over the billions lost due to 'smart contracts' being unable to maintain the algorithmic value they were promised to.
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by richard.h.gao »

galawdawg wrote: Mon Jun 13, 2022 4:35 pm It is a disservice to other Bogleheads to falsely state something as fact based merely upon your single anecdotal experience that may have been an error or technical glitch during your particular ACATS transfer. Could an error have occurred...certainly. No person or business is perfect. Were you satisfied with your experience with Schwab? Obviously not. However, does Schwab charge "$25 to transfer your assets out, per asset, in addition to a $50 transfer fee" as you claim. No.
Yet that's exactly what happened, when I did a transfer out. You can spin it however you want, doesn't change the facts.
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by BackToSchoolDad »

Schwab's 2055 index retirement fund is one of my largest holdings and this has me reconsidering that. It has about a 1% allocation to cash which always struck me as a bit high.
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by Whakamole »

BackToSchoolDad wrote: Tue Jun 14, 2022 8:06 am Schwab's 2055 index retirement fund is one of my largest holdings and this has me reconsidering that. It has about a 1% allocation to cash which always struck me as a bit high.
Cash would have been the best performing holding this year. That aside, 0.51% cash (what their 2055 reports) is not going to move the needle.
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by typical.investor »

BackToSchoolDad wrote: Tue Jun 14, 2022 8:06 am Schwab's 2055 index retirement fund is one of my largest holdings and this has me reconsidering that. It has about a 1% allocation to cash which always struck me as a bit high.
It’s done a hair better in it’s life than Vanguard’s or Fidelity’s 2055 fund.

https://www.portfoliovisualizer.com/bac ... ion3_3=100
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by MnD »

Schwab makes almost all their money by sweeping idle cash in regular accounts into their FDIC bank along with doing so in robo-accounts.
So if you just pay attention to that fact, you get the free lunch of fantastic service, low expenses and great offerings.

I don't buy sushi at the otherwise wonderful gas station and don't leave idle cash in the default sweep account at Schwab.
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by richard.h.gao »

toddthebod wrote: Mon Jun 13, 2022 6:28 pm Since I'm the one who started the speculation on the previous thread (based on the only $25 fee on the Schwab fee list (https://www.schwab.com/pricing) being for broker-assisted trades), let me speculate anew: Schwab also charges $25 for partial ACAT transfers. ACAT transfers are initiated from the receiving end. I bet this guy listed his ETFs on his transfer form instead of just checking the full transfer box, so the receiving broker executed individual partial transfers for each ETF.
Are you suggesting Schwab charged $50 fee for a partial transfer, in addition to the $25 partial transfer fee? Wow, that is even worse than previously speculated. Schwab keeps getting worse and worse.
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by toddthebod »

richard.h.gao wrote: Tue Jun 14, 2022 12:16 pm
toddthebod wrote: Mon Jun 13, 2022 6:28 pm Since I'm the one who started the speculation on the previous thread (based on the only $25 fee on the Schwab fee list (https://www.schwab.com/pricing) being for broker-assisted trades), let me speculate anew: Schwab also charges $25 for partial ACAT transfers. ACAT transfers are initiated from the receiving end. I bet this guy listed his ETFs on his transfer form instead of just checking the full transfer box, so the receiving broker executed individual partial transfers for each ETF.
Are you suggesting Schwab charged $50 fee for a partial transfer, in addition to the $25 partial transfer fee? Wow, that is even worse than previously speculated. Schwab keeps getting worse and worse.
No, I'm suggesting I've never read a single similar complaint from anyone else, and you spam every thread that mentions Schwab to share your single "bad" experience (which wasn't even that bad, considering you got your money back), so I'm suspecting either you did something wrong that caused the excess fees, or you're astroturfing for a competitor.
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by LadyGeek »

richard.h.gao - According to this post, you were refunded those charges. Further comments indicate your statements regarding Schwab fees are incorrect.

If you wish to discuss this further, please PM me.

The discussion is getting derailed. The points have been made, let's move on.
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by harikaried »

Schwab emailed today with a link to the SEC order:
https://www.sec.gov/litigation/admin/2022/34-95087.pdf

And a link to https://www.sipdistribution.com/ which says "At this time, we do not know the amount you may receive" and "when disbursements will be issued" but at least "If you are eligible to receive a payment, this will occur automatically."
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by greg24 »

.....
Last edited by greg24 on Wed Jun 22, 2022 2:16 pm, edited 1 time in total.
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by Wrench »

Granger wrote: Mon Jun 13, 2022 3:35 pm Will Schwab robo-advised clients reap any of the benefit of this settlement?

Silly question, probably.
Answer: yes. I was in intelligent portfolio during the time period in question. I got an email today from Schwab saying there would be some compensation, but the details have not been approved yet. I assume the amount received will vary based upon how much was held in intelligent portfolio and for how long. Based upon past experience with such settlements for various issues, I don't expect much. Maybe I'll be able to go out to a nice dinner with DW on the amount, but probably not much more.

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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by loghound »

harikaried wrote: Wed Jun 22, 2022 9:58 am Schwab emailed today with a link to the SEC order:
https://www.sec.gov/litigation/admin/2022/34-95087.pdf

And a link to https://www.sipdistribution.com/ which says "At this time, we do not know the amount you may receive" and "when disbursements will be issued" but at least "If you are eligible to receive a payment, this will occur automatically."
While it's sort of impossible to get an accurate estimate how much money any individual investor will get sort of guestimate it. Schwab has 33M accounts open and if we assume .5% of them had an Intelligent Investor account open that would indicate 165,000 Intelligent investor accounts, the settlement amount was $186M so the average account holder will get a settlement of

$186M/165,000= ~$1,100

Of course, an average number is silly because they will refund people based on the size of accounts (or more specifically the amount of cash that was held) -- Also my estimate of 0.5% of Schwab customers using this service could be off quite a bit but it seems like the settlement will be something in that ball park (a few hundred dollars to a few thousand dollars)
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by pascalwager »

MnD wrote: Tue Jun 14, 2022 12:01 pm Schwab makes almost all their money by sweeping idle cash in regular accounts into their FDIC bank along with doing so in robo-accounts.
So if you just pay attention to that fact, you get the free lunch of fantastic service, low expenses and great offerings.

I don't buy sushi at the otherwise wonderful gas station and don't leave idle cash in the default sweep account at Schwab.
Agreed, and "Cash: $0.00" must be burnt into my computer screen by now.
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by yatesd »

I’ll just add that I am still a fan of this product. As already mentioned, cash has done comparatively well this year.

My current cash allocation in the Intelligent Management portfolio is 7.7%. As a 51 year old male, this seems reasonable (although admittedly higher than I might have personally chosen).

My expenses are low for a quasi-managed account, and I have access to an investment advisor with annual (on demand) financial planning meetings for $360 a year (about 10% of the cost of Vanguard PAS for my account value)

Free checking, full account integration, and 24 hour service helps to improve the overall value I receive. I’m only about 6-months into this change after being with Vanguard for 20+ years, but so far I am pleased.
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by NYCaviator »

It really goes to show that there are no free lunches. The discount brokerage game is a race to the bottom in many respects.
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Re: Charles Schwab Paying $186 Million in Regulatory Settlement Over Robo-Adviser Business

Post by Lastrun »

NYCaviator wrote: Thu Jun 23, 2022 6:27 am It really goes to show that there are no free lunches. The discount brokerage game is a race to the bottom in many respects.
Agreed, I never had a problem with what Schwab did, and is doing, with the SIP/CFP program. I think it is a good option for someone who wants a personal touch. A couple of points:

1. Cash Drag. Since typical AUM advisors draw quarterly, I have seen they naturally keep a fair amount of cash in the portfolio for these draws. So I suspect there is a cash drag with any advisor situation whether imbedded in the portfolio or not (other than possibly hourly).

2. True Robo's. I don's see the value of a true robo advisor--one could probably do better with a target date fund or life cycle fund. An exception here would be something like M-1. So SIP/CFP, PAS, or Fidelity's 0.50% program is where the price point is for the human touch.

3. Bogleheads. I am always surprised in the race to the bottom the level of service BH's demand for free. I chuckle when someone says: "oh and Fidelity had an attorney review my estate plan for free." Someone is paying for these services. The BH may be the winner because they understand the game better, but the other person that ended up hiring the attorney paid for that, and the AUM or high fee fund person at Fidelity or Schwab pays for the better customer service experience for us overall.
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