How We Make Investment Recommendations
Schwab has policies and procedures governing the advice that our representatives give clients about which investments or products to buy, hold, and sell, regardless of account type. These policies and procedures place certain limitations on the investment advice our representatives can give and the investment products they can recommend. Our investment advice recommendations are intended to be:
- Consistent with generally accepted investing principles.
- Based on the circumstances and needs of individual clients.
- Compliant with applicable laws and regulations, including any applicable fiduciary obligation to act in our clients’ best interest.
- Implemented through products and services that are available at Schwab.
Schwab and its representatives can earn more money based on the recommendations we make to clients. This means we have conflicts of interest.
For additional information on related topics, please reference:
Below, we explain the circumstances under which Schwab representatives may recommend buying a particular security or product type or an investment approach or strategy. Schwab representatives can generally recommend holding or selling any investment based on a client’s needs and circumstances. Apart from the criteria described below, Schwab representatives may also recommend the purchase of an investment, with pre-approval, based on a client’s needs and circumstances.
Schwab representatives may recommend the asset allocation model portfolios that are established and maintained by Schwab.
With exceptions for certain client preferences, each asset allocation model portfolio created by Schwab specifies targeted percentages of large-cap, small-cap, and international equities; fixed income; and cash investments. The model portfolios do not specify which specific products or even product types (e.g., mutual funds versus individual equity or fixed income securities) should be used to fill out each asset category.
Schwab representatives may recommend the purchase of any equity (or stock) that has a Schwab Equity Rating (“SER”) of “A” or “B.” Schwab Equity Ratings® use a scale of "A", "B", "C", "D," and "F" ratings that are assigned to approximately 3,000 U.S.-traded stocks, with a roughly equal number of “buy” and “sell” ratings. Schwab representatives may also recommend the purchase of equities not rated by Schwab but rated 4 or 5 STARS by CFRA (formerly Standard & Poor’s).
For U.S. exchange-listed American Depositary Receipts ("ADRs"), Schwab representatives may recommend purchases of those whose underlying individual equity is rated "A" or "B" by the Schwab Equity Ratings International® (“SERI”) stock rating methodology, and whose issuer's country of residence has received a "risk rating" deemed acceptable by Schwab from a third-party ranking service. SERI is Schwab’s proprietary rating system for evaluating non-U.S. stocks, using a similar approach to SER and employing the same "A", "B", "C", "D," and "F" scale.
Schwab representatives may recommend the following options trading strategies:
- The purchase of put options to reduce portfolio risk—e.g., equity, ETF, or index puts;
- Establishing an equity collar to reduce portfolio risk—e.g., short out-of-the-money calls/long out-of-the-money puts;
- The sale of covered puts/calls when a client is short/long the underlying shares of a stock or ETF and able to assume the risk of assignment (buying/selling those shares);
- The sale of cash-secured puts on stocks rated A or B by SER and ETFs on the Schwab ETF Recommendable List; and
- Closing a cash-secured short put on a stock originally rated A or B by SER that has changed to a D or F.
Schwab representatives may make a hold recommendation for put options, equity collars, covered calls/puts, or cash-secured put options on SER A-, B-, or C-rated positions, based on the client's needs or circumstances and a consideration of other relevant risks and factors.
Schwab representatives may recommend the purchase of any mutual fund that appears on a Schwab-maintained mutual fund recommendable list or, for mutual funds already owned by or mentioned by a client, that receives an “A” or “B” rating from the internal Schwab Mutual Fund Rating System.
Schwab’s affiliate Charles Schwab Investment Advisory, Inc. (“CSIA”) creates Schwab mutual fund recommendable lists based on parameters approved by Schwab that include both quantitative and qualitative eligibility criteria. Although CSIA itself does not receive any compensation from fund companies and does not explicitly consider Schwab’s relationships with the fund companies, Schwab has designed some of these criteria so that most, but not all, of the recommendable funds are no-load, no-transaction-fee funds that are part of the Schwab Mutual Fund OneSource® service, with some prominence given to Schwab Affiliate Funds. Schwab or its affiliates earn more money from third parties and affiliates when clients purchase and hold OneSource and Schwab Affiliate Funds.
However, Schwab also maintains other recommendable lists, including the client-facing Transaction Fee Mutual Fund List, which features recommendable third-party funds that are not in the Schwab Mutual Fund OneSource service. Lists that are not available directly to our clients include a special internal list for clients enrolled in our non-discretionary investment advisory service, Schwab Private Client™, which includes institutional mutual funds, and a list of index mutual funds that meet CSIA’s quantitative evaluation criteria.
Eligibility rules may include limiting the number of funds per category in each list, requiring a minimum asset level for each fund, and, for certain lists, selecting only Schwab Mutual Fund OneSource® funds and/or Schwab Affiliate Funds. The quantitative criteria may examine such factors as a fund's expense ratio, risk- and style-adjusted performance, assets under management, and cash flows. Qualitative criteria, if applicable, may include Schwab's evaluation of a fund manager's strategy and risk management.
Schwab representatives may recommend the purchase of exchange-traded funds that appear on the Schwab ETF Recommendable List, which is not published to clients, or the Schwab ETF Select List®, which is published to clients.
CSIA creates both lists based on parameters approved by Schwab that include both quantitative and qualitative criteria. The ETF Select List contains one ETF for each category, generally the highest-rated eligible ETF in terms of total cost of ownership (subject to other quantitative and qualitative criteria), which is determined by assuming a $6,000 investment held for five years and taking into account the price of two Schwab online trading commissions and the bid-ask spread. Because ETFs managed by Charles Schwab Investment Management, Inc. (Schwab Affiliate ETFs) and other ETFs participating in the Schwab ETF OneSource™ service (OneSource ETFs) trade commission-free through Schwab.com, Schwab Affiliate ETFs and other OneSource ETFs enjoy an advantage over other eligible ETFs. The ETF Select List is also subject to the limitation that no more than 1/3 of the ETFs on the list may be from one firm, a limitation applicable to Schwab Affiliate ETFs as well.
Schwab Affiliate ETFs are generally included on the ETF Recommendable List for their first 12 months post-launch, only after which they must satisfy the criteria applicable to other ETFs.
Schwab representatives may generally recommend the purchase of registered, U.S. dollar denominated, individual investment-grade fixed income securities. Investment-grade bonds are those rated BBB– or higher by Standard & Poor’s and Baa3 or higher by Moody’s. Recommendable notes are those rated A-2/SP-2 or higher by Standard & Poor’s and P-2/MIG-2 or higher by Moody’s. Investment-grade commercial paper is commercial paper rated A-2 or higher by Standard & Poor’s and P-2 or higher by Moody’s.
Schwab representatives may recommend that clients allocate cash investments into two categories:
- Savings and Investment cash: saving for a milestone or emergency fund, or longer-term cash investment as part of one of the strategic asset allocations described above; and
- Everyday cash: readily available for purchasing investments or recurring expenses like monthly bill-paying.
Recommendations of specific investment products for each of these categories are subject to the policies and guidelines applicable to the product in question.
Schwab representatives may talk to Schwab clients about pledged asset lines of credit, mortgages, and home equity lines of credit offered by or for Charles Schwab Bank.
Schwab representatives may recommend the use of margin loans for the purpose of buying securities and for certain alternative uses like education or home improvement expenses.
Schwab representatives may recommend a 529 plan if it is suitable for the client's circumstances and education savings needs in light of income tax treatment, annual and lifetime funding limits, estate planning considerations, and the client’s need for flexibility and/or control.
The only 529 plan currently available through Schwab is the Schwab 529 College Savings Plan (the "Plan"), for which Schwab receives remuneration. The Plan is sponsored by the state of Kansas and managed by American Century Investment Services, Inc. Investment choices within the Plan are limited to portfolios corresponding to Schwab's asset allocation models and the underlying mutual funds and money market funds that fill the asset allocation categories within each portfolio. The portfolios include American Century and other third-party funds, as well as Schwab Affiliated Funds.
Schwab representatives may recommend the purchase or exchange of fixed and variable annuity products.
Annuities available through Schwab are limited to those offered by insurance companies that compensate Schwab for its role as agent for the sale and servicing of annuity contracts. Schwab selected the annuity providers based on a number of business factors, including Schwab’s ability to include affiliated investment products such as mutual funds (in the variable annuity products), the product fees and expenses associated with each annuity, and the industry ratings and financial condition for each provider.
Schwab representatives provide information about rolling over to an IRA at Schwab. If a Schwab representative recommends a rollover, a Schwab IRA is the only IRA that the Schwab representative may recommend.
Schwab representatives may recommend Schwab-sponsored or Schwab affiliated investment advisory wrap fee programs, and make referrals to independent third-party investment advisors through the Schwab Advisor Network® ("SAN"). Schwab-sponsored and Schwab-affiliated investment advisory wrap fee programs include: (1) Schwab Private Client, with non-discretionary management provided by Schwab affiliate Schwab Private Client Investment Advisory, Inc.; (2) Schwab Managed Portfolios, with discretionary mutual fund and ETF portfolios managed by CSIA; (3) Schwab Managed Account Select® ("Select"), with discretionary management provided by unaffiliated separate account managers; (4) Schwab Managed Account Connection®, with discretionary management provided by affiliated managers Windhaven Investment Management and ThomasPartners Investment Management, each a division of CSIA; (5) Schwab Intelligent Portfolios® ("SIP"), an all-electronic discretionary ETF solution with portfolio management provided by CSIA; and (6) Schwab Intelligent Portfolios Premium™ a service that combines SIP with ongoing financial planning.
Schwab selects both affiliated and unaffiliated portfolio managers based on due diligence which varies in type and frequency according to program. Unaffiliated managers in Select and unaffiliated advisors in SAN must also meet Schwab business criteria for participation, which include a willingness to accept the program’s fee structure and account minimums.
If you choose to invest through one of the programs described above, you will receive more specific information about the program, including detailed fee information, as part of the enrollment process.
The contents of this How We Make Investment Recommendations disclosure may change from time to time without notice, and the internal policies and procedures described may be changed at any time before updates are published on this website. Please call 800-435-4000 if you have any questions or would like to request copies of any documents.