When individual investors purchase products or services from Schwab, we may earn money from third parties or affiliates in addition to the fees paid by our clients. This compensation may apply to products or services that are bought, sold, or introduced through Schwab, and it includes two primary areas:
- Compensation from purchases and sales in client accounts, including stocks, mutual funds, fixed income, and a variety of financial products.
Equities and Options
Initial Public Offerings and Secondary Offerings
Schwab Mutual Fund OneSource® Service and Other No Transaction Fee Funds
Transaction Fee Funds (“Fee Funds”)
Schwab Affiliate Funds
Schwab 529 College Savings Plan and Learning Quest® Education Savings Program
- Compensation from investment advisory services, such as Schwab Advisor Network®
Schwab Advisor Network
Please note that the information above describes how Schwab earns money from third parties, not how clients pay Schwab for services. Information about what clients pay Schwab can be found at www.schwab.com/pricing or in the disclosure brochures that describe Schwab's fee-based advice programs. Schwab also earns money on the idle cash in client accounts. See Cash Features Disclosure Statement for Individual Investors.
Compensation from Purchases and Sales in Client Accounts
As a broker-dealer, Schwab makes money when clients trade and hold stocks, options, mutual funds, bonds, and other securities in Schwab accounts, and when clients buy insurance and annuity products through Schwab.
Schwab benefits financially from arrangements it has made with UBS for the execution of customers' stock and option orders.
In October 2004, The Charles Schwab Corporation completed the sale of its capital markets affiliate, Schwab Capital Markets, L.P., to UBS Americas, Inc. As part of this sale, the corporation entered into eight-year service agreements with UBS Capital Markets, L.P. and UBS Securities LLC, under which UBS would provide Schwab with continued access to the order handling technology and trade execution services formerly provided by Schwab's own capital markets affiliate. Under these service agreements, UBS manages the execution of most types of equity and options trade orders for which customers have not provided specific instructions and order routing services for most types of directed orders.
Exchanges and broker dealers frequently offer rebates for customer orders routed to them for execution. Although Schwab does not receive rebates or other payments from UBS, part of the consideration the corporation received for the sale of its capital markets business related to the services agreements with UBS and Schwab's commitments to route most types of equity orders and listed options orders through UBS for eight years.
UBS may act as agent or principal in executing equity orders, and the net price paid or received by clients may reflect the bid-ask spread at which each order was executed. A principal buys or sells securities for its own account, accepts the risk of market price and liquidity fluctuations when executing customer orders, and attempts to profit from the bid-ask spread, which is the difference between the prices at which buyer offers to buy and seller offers to sell the same security. An agent, on the other hand, executes securities trades on behalf of its clients with a third party (typically an exchange or another broker-dealer) and profits from the resulting commission or fee.
For most types of options orders, UBS employs proprietary technology to scan the options marketplace and route orders to exchanges automatically, based on the best price available nationwide and other execution-quality factors. When one or more markets are quoting the same best price, UBS may direct orders on a preferred basis to options exchanges where UBS operates as the specialist or market maker in that options class, and may also direct orders on a preferred basis to, and receive rebates from, exchanges and specialists and market makers not affiliated with UBS.
All UBS routing and execution services are subject to Schwab's execution quality standards for achieving best execution. In certain circumstances, Schwab itself may route orders directly to a market for execution. Schwab regularly monitors the execution quality provided by the various markets to which UBS and Schwab may route orders, to ensure orders are routed to markets that have provided high-quality executions over time.
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Under a separate agreement between UBS and Schwab, UBS makes available to Schwab shares in initial public offerings (IPOs) and new issue secondary offerings that are lead-managed and underwritten by UBS. Schwab, in turn, makes these shares available to clients who have subscribed to IPO access. Schwab receives one-third of UBS's customary syndicate fee, or dealer concession, on sales of these new issues to Schwab clients.
Schwab receives compensation from mutual fund companies when clients invest in a mutual fund.
Schwab receives fees and other remuneration from mutual fund companies or their affiliates for the recordkeeping, shareholder services, and other administrative services that Schwab provides to shareholders of the funds. These shareholder services include transaction processing, settlement of trades, dividend distribution, record maintenance, and distribution of statements, confirmations, prospectuses, and other regulatory shareholder documents.
The type of compensation depends on the manner in which the fund is made available to customers at Schwab, including:
- Schwab Mutual Fund OneSource® Service and Other No-Transaction-Fee Funds
- Transaction Fee Funds
- Load Funds
- Schwab Affiliate Funds
Through Schwab Mutual Fund OneSource, Schwab offers a selection of no-load and load-waived mutual funds. Schwab receives remuneration for the shareholder services provided to these funds and other no transaction fee funds it makes available (collectively, "NTF funds"). There are over 11,300 NTF funds available for Schwab clients to choose from.
To compensate Schwab for various shareholder services, NTF funds pay Schwab an asset-based annual fee, which usually equals 0.40% of the average fund assets held at Schwab but may be as high as 0.45%. The fee may be subject to a monthly minimum that generally does not exceed $2,000 and applies beginning with the seventh full month after the fund is made available for purchase at Schwab. When adding a new fund to Schwab’s NTF platform, NTF funds also pay Schwab a one-time establishment fee, which Schwab may waive. The amount of this fee generally does not exceed $10,000 for the first fund added and $1,000 for each new fund after that.
NTF funds also may pay asset-based fees on shares made available to retirement and other benefit plan participants through Schwab's affiliate, Schwab Retirement Plan Services (SRPS). The annual fees paid on plan shares generally range from 0.10% to 0.50%—but in rare cases can range up to 1.10%—of the average fund assets held at Schwab. Schwab typically passes through all or a portion of those fees to plan trustees and record keepers, some of whom may be affiliated with Schwab, for the shareholder and administrative services they provide to plan participants. These shareholder and administrative services vary depending on the type of retirement or other benefit plan, but typically include processing of plan purchases, redemptions and exchanges, processing of dividends and distributions, distribution of plan account statements, distribution of fund documents, administration of plan benefits, and maintenance of plan records. Passing through a portion of the shareholder servicing fees to plan trustees and record keepers generally helps defer other fees plans would pay to Schwab.
To the extent that any part of these fees is paid out of fund assets, fees are included in the fund’s operating expense ratio (OER), which means the fees are indirectly borne by the fund’s shareholders.
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As set forth in the Charles Schwab Pricing Guide, Schwab charges clients a transaction fee for the purchase or sale of certain funds that are not included in the Schwab Mutual Fund OneSource program. Some Fee Funds pay Schwab an annual fee usually equal to $20, but sometimes as high as $30, per customer position, typically subject to a quarterly minimum of $7,500 per fund. Rather than paying a per-customer account fee, some Fee Funds choose instead to pay Schwab an asset-based annual fee of up to 0.25% of the average assets held at Schwab.
When adding a new fund to Schwab's platform, Fee Funds also pay Schwab a one-time establishment fee, which Schwab may waive. The amount of this fee generally does not exceed $10,000 for the first fund added and $2,000 for each new fund after that. To the extent any of these fees are paid out of fund assets, fees are included in the fund’s OER and are indirectly borne by the fund’s shareholders.
Both types of fees are in addition to the transaction fee that shareholders pay to Schwab. There are approximately 3,175 Fee Funds available for Schwab clients to choose from.
When clients purchase or redeem shares of a load fund through Schwab, either a front-end or back-end sales charge (a "sales load") may be assessed.
Schwab will receive all or a portion of any front-end sales load that clients are charged on the purchase of fund shares, the amount of which is described in the prospectus.
Generally, Schwab does not allow the purchase of back-end load funds, but as an accommodation to its customers, will custody shares and process redemption transactions for shareholders. Schwab does not receive any portion of the sales charge in connection with the purchase or redemption of shares of back-end load funds, the amount of which is also set forth in the fund's prospectus. There are approximately 540 Load Funds available for Schwab clients to choose from.
Load Funds also pay Schwab fees for shareholder services out of their distribution and/or servicing plans (aka Rule 12b-1 plans), the amounts of which are determined by the funds' boards of trustees and disclosed in their prospectuses. Shareholder service fees paid to Schwab pursuant to a 12b-1 plan are included in the fund’s OER and are indirectly borne by the fund’s shareholders.
Schwab may also receive an annual per-account fee from Load Funds for additional account maintenance services, typically referred to as networking fees or sub-accounting fees, and most often equal to $6.
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Schwab currently has two affiliated mutual fund families: Schwab Funds® and Laudus Funds®.
Schwab's affiliate, Charles Schwab Investment Management, Inc. (CSIM), serves as investment advisor to both fund families. These Schwab Affiliate Funds pay CSIM a fee for investment advisory services, the amount of which is described in the funds’ prospectuses. This fee is included in the funds' OER and is indirectly borne by the shareholders.
All Schwab Funds and Laudus Funds are part of Schwab's Mutual Fund OneSource platform. Consequently, like unaffiliated Mutual Fund OneSource and NTF mutual funds, the Schwab Funds and Laudus Funds pay Schwab an asset-based fee for the shareholder services that Schwab provides.
Schwab Funds have adopted a shareholder servicing plan pursuant to which they may pay fees for shareholder services ranging from 0.02% to 0.25% annually on all funds except the Schwab Target Funds and Schwab Monthly Income Funds. Laudus Funds pay a fee ranging up to 0.40% annually for the shareholder services that Schwab provides, of which all or a portion may be paid from the funds' Distribution and Shareholder Service Plan (12b-1 Plan). These fees are part of the funds' OER and are indirectly borne by the funds' shareholders.
In aggregate, the fees Schwab receives from Schwab Affiliate Funds are greater than the compensation Schwab receives from unaffiliated fund companies participating in the Schwab Mutual Fund OneSource Service.
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Assume that for each example in the table below, $10,000 was invested in the fund on January 1 and held until December 31 of the same year, and that the fund did not change in value over that period. The examples below are illustrative and hypothetical. Actual fees will vary depending upon multiple factors, including fluctuations in the values of fund shares and differences in the fee rates negotiated between Schwab and particular funds.
|Fund Category||Assumed Annual Fees||Fund Payment to Schwab
(excluding, e.g., front end loads, transaction fees, and other fees paid to Schwab by client)
|NTF Funds||0.40% of fund assets||$40|
|Fee Funds||$20 per position per customer account
0.15% of average fund assets
|Load Funds||0.25% Shareholder Services fee
$6 annual networking fee
|Schwab Premier Equity Fund®||0.73% investment advisory fee
0.25% Shareholder Services fee
In addition to the fees described above, Schwab may earn additional compensation from certain mutual funds for the administrative services Schwab provides in connection with various marketing opportunities. The amount of such fees varies depending on the type and number of opportunities in which the fund participates. For more information about these particular fees, please read more about mutual funds on www.schwab.com.
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Schwab has annuity-selling agreements in place with several insurance companies. Schwab is paid a commission directly by insurance companies for its role as agent for the sale and servicing of the annuity contracts. The compensation paid to Schwab varies based upon the insurer and the type of annuity contract sold.
- Variable Annuities: Schwab's compensation generally consists of an up-front commission payment based on the dollar amount of any new purchase payment and an annual trail commission, which is based on the asset value of the annuity. The maximum up-front gross commission paid to Schwab is 1.25%. The maximum trail commission paid to Schwab is 0.80%.
- Fixed Annuities: Generally, Schwab's compensation is based on the initial purchase payment amount. The commission rate will vary based on the type of fixed annuity contract purchased. The maximum gross commission based on type of annuity is a 2.5% up-front commission for fixed deferred annuities and a 3.5% up-front commission for fixed immediate annuities.
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Schwab has entered into a marketing agreement with SBIA, Inc. ("SBIA") to offer term life insurance to Schwab customers. SBIA is a managing general agency that has selling agreements in place with several insurance companies. The insurance companies pay commissions directly to SBIA. SBIA pays Schwab a referral fee of 50% of the first-year commissions paid to SBIA, not to exceed 55% of the paid policy first-year premium. Schwab has also entered into an agreement with SBIA to offer long-term care insurance to Schwab clients. SBIA pays Schwab a referral fee of 50% of the first-year commissions paid to SBIA, not to exceed 27.5% of the paid policy first-year premium.
Long-Term Care Insurance
Schwab has also entered into an agreement with SBIA to offer long-term care insurance to Schwab customers. The insurance companies pay commissions directly to SBIA. SBIA pays Schwab a referral fee of 50% of the first-year commissions paid to SBIA not to exceed 55% of the paid policy first-year premium.
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Schwab may act as principal or agent in executing trades in individual fixed income securities on your behalf. Acting as principal means Schwab sells securities directly to clients, either by owning or acquiring at the time of trade securities that sell on the secondary market or by participating in selling groups or entering into distribution agreements that allow us to acquire inventory of new-issue securities. Schwab participates in the fixed income market as principal in order to access a wide array of bonds for our clients at competitive prices and to provide liquidity in connection with clients' sales of fixed income securities. But you should be aware that when Schwab deals with you on a principal basis, it raises a conflict of interest, as explained below.
In secondary market principal transactions the price will include a markup in the case of client purchases and a markdown in the case of client sales and may include a profit or loss to Schwab. When we sell clients a ﬁxed income security from our own account or purchase from clients a ﬁxed income security into our own account, the price clients pay or receive reﬂects the bid-ask spread at which the order is executed. Likewise, when we sell you new-issue securities, Schwab receives a customary placement fee or selling concession for providing distribution and operational services, which ranges from less than 0.01% to 2% of the par value, or face amount, of the security, depending on the product. The percentage rate of the placement fee or selling concession may differ not only between different new-issue offerings, but also between different series and maturities within a single offering.
Schwab has entered into a fixed income dealer agreement with J.P. Morgan Securities LLC ("J.P. Morgan") to purchase from J.P. Morgan, and sell to our clients acting as principal, certain new-issue fixed income securities from offerings in which J.P. Morgan acts as an underwriter or a selling group member. Pursuant to this agreement, Schwab receives a portion—and, in some cases, all—of the relevant selling concession. The percentage of the selling concession received by Schwab depends upon the type of offering, the type of security, and the underwriting syndicate's arrangement with the issuer. Although Schwab's aggregate compensation for a particular offering increases with the number of securities in the offering that Schwab sells to its clients, the portion of the selling concession Schwab receives in an offering does not vary based upon the number of securities sold to its clients.
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Schwab makes available to its clients various structured products including principal protected notes, structured certificates of deposit and buffered notes. Schwab receives a one-time dealer or sales concession, which is built into the purchase price, when clients buy a structured product. The amount of the concession typically ranges from approximately 1.5% to 3.5% of the par value, or face amount, depending on the structured product.
Schwab does not trade futures and is not a Futures Commission Merchant. However, for clients who have a desire to trade futures, we have an introducing broker relationship with a Futures Commission Merchant not affiliated with Schwab. Per the terms of that relationship, Schwab receives a portion of the commissions that Schwab clients pay to that company.
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The Schwab 529 College Savings Plan and Schwab Learning Quest Education Savings Program are education investment programs administered by the State of Kansas pursuant to Section 529 of the Internal Revenue Code. These plans are managed by American Century Investment Management, Inc. ("American Century"). Schwab serves clients who invest in both the Schwab 529 Plan, which Schwab continues to make available, and the Schwab Learning Quest program, which Schwab no longer makes available to new clients.
The portfolios available under the Schwab 529 Plan are based on asset allocation models devised by Schwab and composed of mutual funds selected by American Century as the Program Manager. These funds must meet criteria set forth in an agreement between Schwab and American Century. The portfolios include NTF funds and Schwab Affiliate Funds. Schwab receives a fee from American Century for providing services to Schwab clients invested in the Schwab 529 Plan based on total assets held in the Schwab 529 Plan, other than Schwab Affiliate Funds.
The Schwab Learning Quest program is composed of American Century Funds and Vanguard Funds selected by American Century, as the Program Manager. Schwab receives a portion of this fee from American Century for providing services to Schwab clients invested in Schwab Learning Quest, which is based on the total assets held in the Schwab Learning Quest plan and the average account size.
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Compensation From Investment Advisory Services
Through the Schwab Advisor Network, Schwab refers individual investors to independent investment advisors, who provide a wide range of financial planning and wealth management services. Advisors participating in the Schwab Advisor Network are independent and not affiliated with Schwab.
Although Schwab does not charge a fee for making these referrals, investment advisors pay a quarterly fee to Schwab to participate in the program. The fee has a sliding scale that starts at 0.25% of the assets attributable to the referral made by Schwab.