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Legal & Compliance
 

How We Make Investment Recommendations

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Schwab has a number of policies that govern the advice that our representatives give clients regarding which investments or products to buy, hold, and sell, regardless of account type.  These policies 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 fiduciary obligation to act in our clients’ best interest.
  • Efficient for us to make and deliver.

Schwab and its representatives can earn more money based on the investment advice we give to clients. This means we have potential 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 manager approval based on a client’s needs and circumstances.


 

Asset Allocation

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.

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Equities

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 Standard & Poor’s.

For 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. 

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Options

Schwab representatives may recommend the following options trading strategies:

  1. The purchase of put options to reduce portfolio risk—e.g., equity, ETF, or index puts;
  2. The establishment of equity collars to reduce portfolio risk;
  3. The sale of covered puts or calls to clients who are short or long the underlying shares and able to assume the risk of buying or selling those shares, respectively; and
  4. The sale of cash-secured puts on individual equities rated A or B by SER and exchange-traded funds ("ETFs") that are recommendable by Schwab representatives.

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. 

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Mutual Funds

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 load-waived institutional mutual funds, and the list of funds held in Schwab Managed Portfolios™, a discretionary mutual fund wrap fee program.

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 style consistency.

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Exchange-Traded Funds

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 $5,000 investment held for one year 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.

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Fixed Income

Schwab representatives may recommend the purchase of individual investment-grade fixed income securities such as bonds. 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.

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Structured Products

Schwab representatives may recommend purchases of approved principal-protected structured notes, structured certificates of deposit, and buffered notes.

Recommendations of structured products are generally subject to criteria such as alignment of the client's investing needs with the specific features offered by structured products (e.g., the desire to capitalize on a particular market view or sector while maintaining some capital preservation) and the client's ability and willingness to bear the liquidity and issuer-default risks that may be associated with the product in question. Recommendations based on these factors are further limited by market availability.

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Cash Investments

Schwab representatives may recommend that clients allocate cash investments into three categories:

  • Long-term cash as part of one of the strategic asset allocations described above;
  • Everyday cash for recurring expenses like monthly bill-paying; and
  • Cash pending investment.


Recommendations of specific investment products for each of these categories are subject to the policies and guidelines applicable to the product in question.

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Credit Products and Margin

Schwab representatives may talk to Schwab clients about mortgages and home equity lines of credit offered by Charles Schwab Bank.

Schwab representatives may recommend the use of margin loans for the purpose of buying securities and for certain other alternative uses like education or home improvement expenses.

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529 Plans

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.

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Annuities

Schwab representatives may recommend purchases of fixed deferred annuities, fixed immediate and fixed indexed annuities, and variable annuities or exchanges of variable annuities. 

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 financial condition of each provider.

Rollover Advice

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.

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Investment Advisory Services

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 (“SPC”), with non-discretionary management provided by Schwab affiliate Schwab Private Client Investment Advisory, Inc.; (2) Schwab Managed Portfolios (“SMP”), 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® (“Connection”), with discretionary management provided by affiliated managers Windhaven Investment Management, Inc. (“Windhaven”) and ThomasPartners, Inc. (“ThomasPartners”); (5) Schwab Intelligent Portfolios® (“SIP”), an all-electronic discretionary ETF solution sponsored by Schwab affiliate Schwab Wealth Investment Advisory, Inc. (“SWIA”), with portfolio management provided by CSIA; and (6) Schwab Intelligent Advisory™ (“SIA”), a Schwab-sponsored 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.

(REG99429-00)