# SEC: Schwab's robo-adviser cash was pre-set for revenue, not by its portfolio methodology; $187m settlement Source: https://www.bankingnewsai.com/ai-incidents/schwab-2022-sec-robo-adviser-cash-allocation Last updated: Oct 22, 2026 The Charles Schwab Corporation (Schwab Intelligent Portfolios) · Governance finding · severity 4 of 5 On 13 June 2022 three Charles Schwab adviser subsidiaries agreed to pay about $187 million to settle SEC charges over the robo-adviser Schwab Intelligent Portfolios. Per the SEC, from March 2015 to November 2018 Schwab's disclosures said the cash in the automated portfolios was set through a "disciplined portfolio construction methodology" and sought "optimal return", when management had pre-set cash at 6% to 29.4% so Schwab's bank would earn a minimum revenue; Schwab's own analyses showed the cash would lower clients' returns under most market conditions. Schwab profited by almost $46 million. The settlement included a $135 million penalty and a Fair Fund for clients. Schwab neither admitted nor denied the findings. The SEC called the product a robo-adviser offering automated management, not AI. ## Key facts | | | | --- | --- | | Date | Jun 13, 2022 | | Institution | The Charles Schwab Corporation (Schwab Intelligent Portfolios) | | Country | United States | | AI system | Schwab Intelligent Portfolios · Robo-adviser providing automated, software-based portfolio management; not described as AI | | AI? | Automated system not described as AI — The system was automated, but neither the institution nor a regulator described it as AI; it is listed because it is routinely discussed as an AI failure. | | Category | Regulatory finding (Governance finding) | | Status | Settled | | Severity | 4 of 5 — Rubric 4 (large losses, consent order): a settled SEC cease-and-desist order with about $187m in disgorgement, interest and a $135m penalty paid into a Fair Fund for robo-adviser clients whose returns the undisclosed cash allocation reduced. | ## What happened? Schwab launched Schwab Intelligent Portfolios (SIP) on 9 March 2015, a robo-adviser that "provides automated, software-based investment portfolio management to clients", according to the SEC order. SIP charged no advisory fee; Schwab instead earned money by placing a fixed share of each portfolio in cash at Schwab Bank and keeping the spread from lending it out. [1][2] To offer SIP without a fee, management decided the portfolios would hold an average of at least 12.5% cash and set each model portfolio's cash level, from 6% in the most aggressive to 29.4% in the most conservative, based in large part on the revenue Schwab Bank would make. The portfolio construction team treated these levels as fixed constraints. Schwab's internal models showed the cash would reduce returns whenever assets such as equities outperformed cash, by about as much as an advisory fee would have, the SEC found. [2] From March 2015 to 30 November 2018, the advisers' Form ADV brochures said the cash allocations were "set based on a disciplined portfolio construction methodology" and referred to modern portfolio theory and an "optimal return goal", and Schwab advertised "no hidden fees [and] no advisory fees". The SEC found these statements false or misleading. SEC enforcement director Gurbir Grewal said 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." [1][2][4] Schwab revised the disclosures and stopped the advertisements on 30 November 2018 after an SEC examination. By then it had profited by almost $46 million from the spread on SIP cash, according to the order. [2] ## Timeline - Mar 9, 2015 — Schwab launches Schwab Intelligent Portfolios with revenue-driven pre-set cash allocations of 6% to 29.4%. [2] - Nov 30, 2018 — Following an SEC examination, Schwab publishes a revised ADV brochure and stops the misleading advertisements. [2] - Jul 1, 2021 — Schwab discloses a $200 million liability and charge in connection with the expected settlement. [3] - Jun 13, 2022 — The SEC issues a settled cease-and-desist order: censure, $45.9m disgorgement plus interest, a $135m civil penalty, a Fair Fund and an independent consultant. [1][2][3] ## What was the impact? - Financial: About $187 million: disgorgement of $45,907,541 plus prejudgment interest (about $52 million together) and a $135 million civil penalty, paid into a Fair Fund for affected investors - Other: Schwab profited by almost $46 million from the spread on SIP cash allocations by November 2018. The SEC found the cash lowered clients' returns, under market conditions where equities outperform cash, by about as much as an advisory fee would have; it did not publish a per-client loss figure. [1][2][3] ## How did The Charles Schwab Corporation (Schwab Intelligent Portfolios) respond? Schwab said it had resolved "a matter with the SEC regarding certain historic disclosures and advertising related to Schwab Intelligent Portfolios between 2015-2018" and that "in entering the settlement, Schwab neither admits nor denies the allegations in the SEC's Order." It said SIP was designed to provide competitive returns, that the order "acknowledges that Schwab addressed these matters years ago", and that "we do not hide the fact that our firm generates revenue for the services we provide." [3][4] ## What was the outcome? The SEC censured the three subsidiaries, ordered them to cease and desist from violating the antifraud provisions of the Investment Advisers Act, and required them to pay disgorgement, interest and a $135 million penalty into a Fair Fund for distribution to affected investors, and to retain an independent consultant to review SIP disclosures, advertising and marketing. The sources reviewed do not report the status of the Fair Fund distribution. [1][2][3] ## FAQ ### Was Schwab Intelligent Portfolios an AI system? The SEC called it a robo-adviser that provides automated, software-based portfolio management, not AI. Its finding was not that software malfunctioned: management pre-set the cash levels for revenue, while disclosures implied they came from a disciplined portfolio construction methodology seeking optimal returns. ### Did Schwab's robo-adviser clients lose money? The SEC found that, under market conditions where assets such as equities outperform cash, the pre-set cash allocations lowered clients' returns by about as much as an advisory fee would have, and that Schwab profited by almost $46 million. The settlement money goes into a Fair Fund for affected investors. ### What did the SEC order Schwab to pay? About $187 million in total: disgorgement of about $45.9 million plus prejudgment interest, together roughly $52 million, and a $135 million civil penalty. The three subsidiaries were also censured and had to hire an independent consultant to review SIP disclosures and marketing. ### What did Schwab say? Schwab neither admitted nor denied the SEC's findings. It said the matter concerned historic disclosures from 2015 to 2018 that it had addressed years earlier, that SIP was built to deliver competitive returns, and that it did not hide that the firm earns revenue from the cash allocation. ## Sources 1. [Schwab Subsidiaries Misled Robo-Adviser Clients about Absence of Hidden Fees (2022-104)](https://www.sec.gov/newsroom/press-releases/2022-104) — U.S. Securities and Exchange Commission, Jun 13, 2022 (official): "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" 2. [Order Instituting Administrative and Cease-and-Desist Proceedings, In the Matter of Charles Schwab & Co., Inc., Charles Schwab Investment Advisory, Inc. and Schwab Wealth Investment Advisory, Inc. (Advisers Act Release No. 6047)](https://www.sec.gov/litigation/admin/2022/34-95087.pdf) — U.S. Securities and Exchange Commission, Jun 13, 2022 (official): "Also, they falsely claimed that the cash allocations in the SIP portfolios were determined through a "disciplined portfolio construction methodology" when in fact they were pre-set for business reasons, and to compensate Respondents for not charging an advisory fee." 3. [Schwab Statement on Settlement With SEC Related to 2015-2018 Disclosures for Schwab Intelligent Portfolios](https://pressroom.aboutschwab.com/press-releases/press-release/2022/Schwab-Statement-on-Settlement-With-SEC-Related-to-2015-2018-Disclosures-for-Schwab-Intelligent-Portfolios/default.aspx) — Charles Schwab, Jun 13, 2022 (official): "In entering the settlement, Schwab neither admits nor denies the allegations in the SEC's Order." 4. [Charles Schwab subsidiaries to pay $187 million to settle U.S. SEC charges](https://www.reuters.com/legal/government/charles-schwab-subsidiaries-pay-187-mln-settle-sec-charges-2022-06-13/) — Reuters, Jun 13, 2022 (news) ## Related incidents - [CFPB fines Oportun's Hello Digit $2.7m after its automated savings algorithm overdrafted customers](https://www.bankingnewsai.com/ai-incidents/oportun-2022-hello-digit-savings-algorithm) - [SEC fines robo-adviser Betterment $9m after coding errors stopped automated tax-loss harvesting](https://www.bankingnewsai.com/ai-incidents/betterment-2023-tax-loss-harvesting-coding-errors) All AI incidents at banks: https://www.bankingnewsai.com/ai-incidents --- Canonical page: https://www.bankingnewsai.com/ai-incidents/schwab-2022-sec-robo-adviser-cash-allocation Part of [BankingNewsAI](https://www.bankingnewsai.com/) — the register of AI incidents at banks: https://www.bankingnewsai.com/ai-incidents. 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