Three investors are suing Charles Schwab, accusing the firm of breaching its fiduciary duty by structuring its cash-sweep program to disproportionately benefit itself at the expense of its clients.
Filed last week in a federal court in Los Angeles, the suit names Mary Loughran, Rosemary Orlando, and Edward Carr as plaintiffs. They are seeking class-action status on behalf of themselves and other Schwab clients affected by the company's practices.
This case adds to the growing list of lawsuits against major wealth management firms over cash-sweep accounts. Recently, clients of Morgan Stanley, Wells Fargo, LPL Financial, and Ameriprise Financial have also pursued legal action.
Schwab’s cash-sweep program involves transferring, or “sweeping,” uninvested client cash into bank accounts that offer FDIC insurance but provide minimal interest. Although Schwab is widely known for its brokerage services, a significant portion of its revenue comes from net interest margin—essentially the spread between interest earned on assets and the lower interest paid on funding sources. Clients’ uninvested cash serves as a key funding source for these interest-earning assets.
The investors claim Schwab has considerable control over its cash-sweep program and deliberately structured it to offer "unreasonably low interest rates." Furthermore, the lawsuit alleges that Schwab's program allows the company to funnel customer deposits into its affiliated banks, enhancing Schwab’s profitability at the direct expense of its clients.
“By designing, implementing, and operating this program to enrich itself at the cost of its customers, Schwab has breached its fiduciary duty to those clients,” the lawsuit states.
The plaintiffs further accuse Schwab of failing to properly disclose details related to its 2020 acquisition of TD Ameritrade, specifically an agreement with TD Bank. According to the lawsuit, Schwab committed to maintaining at least $50 billion in cash-sweep deposits at TD Bank as part of the acquisition. The plaintiffs allege that Schwab did not adequately inform clients of the rationale behind this agreement or the specific financial benefits that TD Bank received.
Schwab denies the allegations, calling the lawsuit “without legal merit,” according to a company spokesperson.
“When clients choose a self-directed approach, they retain full control over their assets and cash management decisions,” the spokesperson said in a statement. “They have access to a variety of cash solutions and detailed information to help them choose options that align with their individual needs. Our cash offerings prioritize safety and liquidity, and our clients value the FDIC insurance combined with convenient access to their funds. For further details, we encourage clients to review our disclosures, which these plaintiffs’ attorneys clearly ignored.”
The investors are seeking class-action status, along with monetary damages and other remedies to be determined by the court.
