The Derivative Project

This Schwab Ad Epitomizes the Disingenuous Advice Industry: Buyer Beware

This Schwab Ad Epitomizes the Disingenuous Advice Industry: Buyer Beware

Chuck Schwab No Accountabliity - Read the fine PrintCharles Schwab was once a leader in doing what is right—a low cost leader – a pioneer in discount commissions.  They are still an excellent custodian and their online tools are top notch. However when Schwab moved into “packaging product” and became the purveyors of “advice” to the retirement industry, they abandoned this hard-earned leadership position.
No Accountability:  As Defined in the Schwab Private Client Agreement
 
Read the fine print of your Charles Schwab Private Client agreement.  There is no accountability, contrary to the white shoe, trusting image Chuck Schwab is trying to portray in his recent full page New Yorker ad on their “Accountability Guarantee.”
The Schwab Private Client Service has no accountability. It is in a four letter word, a sham. You simply pay an annual fee for a Schwab broker to sell you mutual funds that earn commissions for the Schwab broker.  It is a transaction based business and although you pay an annual “advice” fee, in addition to 12 B-1 fees, the responsibility for monitoring your account ends with the sale of the product.  You are responsible for monitoring your accounts.
With $4.7 trillion dollars in IRA’s and over $4.3 trillion in defined contribution plans, the race is on by Wall Street to skim the easy money from American’s hard-earned retirement nest eggs, through easy annual assets under management fees.  It is a brilliant, but deceptive business model to take commissions and an annual investment advice fee, that is at a minimum close to $4000 on a $500,000 equity account, yet to have no ongoing duty to monitor the investments you have sold the client.  Yes, brilliant.
Slap an assets under management fee of 10 basis points or 100 or 200 basis points on $2 trillion dollars, with negligible fixed and variable costs, with no accountability and one can see why the retirement asset management industry is booming, while there is a retirement crisis for the middle class. With zero interest rates and a diversified portfolio, Schwab’s Private Client Advice fees are in essence, a waste of money to the client. They add no value to any retirement investor.  Why?
It is the Size 2 Font Fine Print – in the Schwab Private Client Contract 
The reality is that an IRA investor has no legal recourse when one of Charles Schwab’s Private Client brokers/ “trusted advisors” breaches their fiduciary duty, causing losses far in excess of their quarterly advice retainer.
1.   Schwab charges an annual Assets Under Management fee, but “legally” has no ongoing responsibility to monitor your account.
This is Chuck’s most shocking decpetion to every Schwab Private Client client that pays an annual fee.
Let’s say that you pay Chuck an annual fee to their Private Client Service and the broker/advisor recommends certain mutual funds.  One of the mutual funds, drops in performance significantly and your Advisor does not alert you, since he is getting his 12B-1 fees and does not want his gravy train to end.  He wants you to continue to hold that fund.  It benefits him.
One files a complaint with FINRA, that although the Schwab Broker/Advisor was paid a fee to monitor your investments, they did not.  You are forced into mandatory arbitration by FINRA. You explain to the FINRA panel, that you were told you were buying an “advice” service and the fee would cover monitoring the investments that the broker/advisor recommended that you purchase.
What does Schwab’s attorney tell the FINRA panel?
It is your fault for not reading the fine print in the Schwab Private Client agreement. You do not understand what service you have purchased. This is a “non-discretionary” account.  The broker has no responsibility to monitor the mutual fund after the sale, it is based on the suitability standard, not the Investment Advisors Act of 1940 fiduciary standard.  The Private Client Agreement states, in essence:
“We, Charles Schwab, recommended these mutual funds to you, but it is your decision to go ahead and buy them.”  The fine print relieves Schwab of any responsibility or accountability for ongoing monitoring of what they sold the retirement investor in a Schwab Private Client Account, since it was the retirement investor’s ultimate decision to buy the recommended fund by the Schwab broker/ advisor.
Raise your hand in you thought the Charles Schwab Advisor/Broker had the legal duty to continue to monitor the investments that they recommended that you purchase, since you are paying them an annual fee for “investment advice.”
If not, time to call Chuck and discuss true accountability.  Time to ask for your quarterly fee back for lack of transparency and outright deception.
2.  Schwab’s Private Client service is based on “Investment Advisors” also being stockbrokers, they are what the SEC calls “Dual Registrants.”
A Schwab Private Client customer is a brokerage account client. If a client has a complaint for breach of fiduciary duty, for example, that client is forced into mandatory arbitration, into a kangaroo court run by FINRA.  (Read Larry Doyle’s recent book, In Bed With Wall Street to learn more about FINRA’s kangaroo court.)
Further, according to FINRA’s CEO Richard Ketchum, Congress has not yet given FINRA the authority to enforce breaches of fiduciary duty under the Investment Advisors Act of 1940, only the SEC can do that, but not for IRA accounts.  Yet, you are forced to go to a FINRA arbitration panel based on the mandatory arbitration language— a classic catch-22.
So the retirement investor is out the losses and has no access to a legal due process. There is not a Freedom of Information Act that applies to FINRA.  The cases are never publicly revealed. Thus, the day in and day out theft from American’s retirement savings, due to breach of securities laws, is hidden behind the walls of FINRA and the Wall Street board that controls FINRA.
The Wall Street lobby is so powerful, that even the SEC also refuses to step in and help the IRA investor and adjust the rules. There are now over $4.7 trillion of American’s life savings in this mess, with no legal due process.  The Derivative Project pushed the SEC to fill the Dodd Frank SEC Advocate office with a truly independent advocate for small retirement investors, who are subject to these abuses and lack of legal due process.  Wall Street convinced the SEC to ignore Congress and Dodd Frank and to not allow an advocate for the individual retirement investor that would expose these excessive abuses of securities laws, harming many IRA holders legal rights to a due process.  The revenues are too great and too easy for the likes of Charles Schwab to end this smooth and easy revenue train, that skims millions from the retirement investors, with no accountability.
Further, the SEC cannot file a claim on behalf of an individual retirement account holder when Wall Street has broken securities laws in your IRA.  Remember only FINRA, Wall Street, can order restitution to the IRA investor and FINRA states they do not have the authority to do so.
3.  At Schwab Private Client you Pay Both Commissions and Assets Under Management Fees
Schwab Private Client “dual registrants” are brokers that get commissions and
at the same time “Advisors” that receive a quarterly assets under management fee, which gives them the right to have conflicts of interest.  Why? The SEC has approved this structure.  It just has to be buried in size 2 Font in your Schwab Private Client Agreement, that you agreed to this conflict, based on your signature on the 8 page Agreement.
Raise your hand if you are Schwab Private Client client who is aware of this fact.  Based on accountability and full disclosure, if you did not know this, I’d call Chuck and ask for your last quarterly “Advice” fee to be returned.
You pay a fee to Schwab Private Client for investment advice.  You think that advice, under the Investment Advisors’ Act is based on”fiduciary duty.” Absolutely not.  If a Schwab stockbroker, also a SEC investment advisor is tempted to put you into a mutual fund that pays the advisor an additional 25 basis points in a 12B-1 fee, (who wouldn’t – making money is the name of the game), even if that is not the best mutual fund for you, it is OK by the SEC’s latest rules.  As long as Schwab discloses this conflict in the fine print, they are set to go, according to the SEC, Regulation of Investment Advisers by the Securities and Exchange Commission.
4. Charles Schwab is one of the fee asset managers that is fiercely fighting the concept of class action lawsuits when a retirement account has been harmed.
“Schwab last year asked its almost 9 million clients to sign new account agreements that agreed to waive their class-action rights. The revised policy followed settlements of such suits in which the firm agreed to pay $235 million for misleading marketing of its YieldPlus money-market fund between May 2006 and March 2008.”
A small IRA investor cannot find a securities lawyer to take their case to FINRA. Further, as discussed above, FINRA nor the SEC will enforce breaches of fiduciary duty under the Adviser’s Act. The only hope for the small retirement investor to recoup funds, when securities laws have been breached, is a class action suit.  Charles Schwab knows that.  The deception in these agreements and sham services would also be exposed for what they are in the Federal Courts.
5. Has your Charles Schwab Advisor explained the systemic risks of money market funds to you?  Has Your Schwab Advisor told you about what voluntary recapture is in their money market funds?
 
If your Schwab Private Client Advisor has not yet explained systemic risks in money market funds and their money market mutual fund voluntary recapture program, it is way past time to ask Chuck for your quarterly fee back.
They are not being transparent and are hiding risks that can significantly impact your account balances.
 
Is a Firm Accountable if It Buries Small Print Disclaimers that render the Service Useless in their Account Agreements?
What are you getting in exchange for paying fees and commissions in a Schwab Private Client account? Certainly not any accountability.  Certainly not ongoing monitoring of the product they sold you, despite an annual advice fee.
With no legal recourse in individual retirement accounts, it is buyer beware.  The safe and most conservative route to protect your nest egg is to avoid any financial intermediary, particularly the disingenuous Mr. Schwab.