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Legal & Compliance
 

Schwab Compensation

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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:

Please note that the information below describes how Schwab earns money from third parties or affiliates, not how you and other 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 the Cash Features Disclosure Statement) and on margin balances in client accounts (See applicable Account Agreement and Margin Disclosure Statement).
 
The information and practices presented here are subject to change without notice. More current information may be available. Please call 800-435-4000 if you have any questions or would like to request copies of any documents. Additional information on Schwab investment products, fees and commissions may be found on www.schwab.com.

Compensation Related to Investment Products

As a broker-dealer, Schwab makes money when clients trade and hold stocks, options, mutual funds, exchange-traded funds ("ETFs"), bonds, and other securities in Schwab accounts, and when clients buy insurance and annuity products through Schwab. Generally, Schwab makes the most money on certain types of annuities and mutual funds as compared to other investment products. This is because of the arrangements we have with the third parties who provide those products and the related services we provide for those products, or because Schwab or an affiliate manages or provides those products directly. Schwab makes the least amount of money on stocks and bonds because we generally only execute the transaction and therefore only earn a transaction fee or compensation relating to the transaction. Each investment product is described below, so you have a general idea of how we are compensated for each.

Equities and Option Trade Execution

In arranging for the execution of non-directed orders for equities and listed options, Schwab seeks out industry-leading execution services and access to the best-performing markets. Schwab routes orders for execution to unaffiliated broker-dealers, who may act as market maker or manage execution of the orders in other market venues.

Schwab considers a number of factors in evaluating execution quality among markets and firms, including execution price and opportunities for price improvement, market depth and order size, the trading characteristics of the security, speed and accuracy of executions, the availability of efficient and reliable order handling systems, liquidity and automatic execution guarantees, and service levels and the cost of executing orders at a particular market or firm. Price improvement occurs when an order is executed at a price more favorable than the displayed national best bid or offer. Schwab regularly monitors the execution quality obtained to ensure orders are routed to market venues that have provided high-quality executions over time.

Quarterly information regarding the markets and firms to which we route orders, and remuneration received, is provided at http://www.schwab.com/public/schwab/nn/legal_compliance/important_notices/order_routing.html.

Information regarding the routing destination and time of execution of your orders for up to a six-month period is also available.

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Initial Public Offerings and Secondary Offerings

To be eligible for IPO and secondary offering access, Schwab clients must meet an asset or trading threshold in their Schwab accounts and must participate in certain Schwab client segments or services. Schwab does not receive a syndicate fee, or dealer concession, on sales of these new issues to Schwab clients.

Mutual Funds

When clients invest in a mutual fund in a Schwab account, Schwab may receive compensation from mutual fund companies 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. To the extent that any part of the fees described below are paid out of fund assets, those amounts are included in the fund’s operating expense ratio ("OER"), which means they are indirectly borne by the fund's shareholders. These fees are disclosed in the fund prospectus.

Schwab Mutual Fund OneSource® Service and Other No Transaction Fee Funds (“NTF Funds”)

Many investors at Schwab invest in no-transaction-fee funds through the Schwab Mutual Fund OneSource service, through which Schwab makes available a selection of no-load and load-waived mutual funds. NTF funds pay Schwab an asset-based annual fee, which usually equals up to 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 additional fund within a fund family after that. More information about Schwab’s Mutual Fund OneSource service and Schwab’s other mutual fund platforms is available on schwab.com.

  • Schwab Affiliated Funds. Schwab currently has two affiliated mutual fund families: Schwab Funds® and Laudus Funds® (collectively, "Schwab Affiliated Funds"). Schwab's affiliate Charles Schwab Investment Management, Inc. ("CSIM") serves as investment advisor to both fund families. These Schwab Affiliated Funds pay CSIM a fee for investment advisory services, the amount of which is described in the funds' prospectuses.
  • All Schwab Funds and Laudus Funds are part of Schwab's Mutual Fund OneSource service. Consequently, like unaffiliated Mutual Fund OneSource and NTF mutual funds, many of 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 many of the funds may pay fees for shareholder services ranging up to 0.25% annually. Also pursuant to this plan, some Schwab Money Funds™ may pay Schwab up to an additional 0.15% annually for administrative services Schwab provides to shareholders invested in Sweep and Premier Sweep Shares of the 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 (a Rule 12b-1 plan).
  • Aggregate Fees. In aggregate, the fees Schwab receives from Schwab Affiliated Funds are greater than the compensation Schwab receives from unaffiliated fund companies participating in the Schwab Mutual Fund OneSource service. 
 

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Transaction—Fee Funds ("Fee Funds")

Schwab charges a transaction fee for the purchase or sale of certain funds that are not included in the Schwab Mutual Fund OneSource service or are otherwise no-transaction-fee funds.

Most Fee Funds pay Schwab a low annual asset-based fee, typically 0.10% annually of the average fund assets held at Schwab, although the fee can range up to 0.25% annually. Some Fee Funds pay Schwab a set dollar amount per customer account in lieu of the low asset-based fee, typically $20 per account, but it can range up to $30 per account annually (a "per position fee"). The per position fees may be subject to a quarterly minimum of $7,500 per Fee Fund.

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 additional fund within a fund family after that.

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Load Funds

Generally, load fund transactions are made available only on an accommodation basis, and Schwab annually processes relatively few load fund trades. Schwab earns a commission on such redemption transactions.

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 from load funds, for additional account maintenance services for assets held in omnibus accounts, either an annual per account fee (typically $20 per account) or an annual asset-based fee (typically 0.10% of the average fund assets held at Schwab, although the fee can range up to 0.15% annually). In the alternative, Schwab may receive a networking fee for each sub-account, most often equal to $6 annually.

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Examples

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, for example, front-end loads, transaction fees, and other fees paid to Schwab by the client)
NTF Funds 0.40% of fund assets $40
Fee Funds 0.10% of average fund assets $10
Load Funds 4% front-end sales charge, for which the fund is authorized to pay 0.25% of average fund assets pursuant to the 12b-1 plan for shareholder servicing and a $20 omnibus processing fee $400
+
$25
+
$20

$445

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.

For more detailed information, see Schwab’s Financial and Other Relationships with Mutual Funds at http://www.schwab.com/public/schwab/nn/financial_and_other_relationships.html.

Exchange-Traded Funds

ETFs participating in Schwab ETF OneSource™ ("ETF OneSource") can be traded without a commission on buy and sell transactions made online in a Schwab account. Third-party ETF sponsors or their affiliates participating in ETF OneSource pay Schwab an asset-based fee (which applies only to ETF shares acquired without a commission charge) and a fixed program fee each year for recordkeeping, shareholder services, and other administrative services that Schwab provides to participating ETFs. The asset-based fee varies among ETFs and can be as high as 0.04%. The fixed program fee also varies and may be as much as $15,000 per ETF. Schwab also promotes ETF OneSource to its customers, and a portion of the fees paid to Schwab offsets some or all of Schwab’s costs of promoting and administering the program. Schwab does not receive payment to promote any particular ETF to its customers. Schwab’s affiliate CSIM serves as investment advisor to the Schwab ETFs™, which compensate CSIM out of the applicable operating expense ratios. The amount of the fees is disclosed in the prospectus of each ETF. Schwab ETFs participate in Schwab ETF OneSource but do not pay Schwab a separate fee to participate. 

Annuities

Schwab has annuity-selling agreements in place with several insurance companies, which pay Schwab a commission for serving as the sales agent and for servicing the annuity contracts. The compensation paid to Schwab varies based upon the insurer and the type of annuity contract sold.

  • For variable annuities, Schwab's compensation generally consists of an annualized "trail" commission, which is calculated and paid monthly or quarterly based on the average asset value of the annuity contracts. The maximum trail commission paid to Schwab is 0.60%.
  • For fixed index annuities, Schwab's compensation is generally based on a percentage of the initial purchase payment amount. The commission rate will vary based on the type of fixed annuity contract purchased. The maximum gross commission payable on a fixed deferred annuity is a 4% upfront commission.  The typical gross commission payable on a fixed immediate annuity is a 4% upfront commission. The maximum gross commission payable on a deferred income annuity is a 5% upfront commission.

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Life Insurance, Disability Insurance, and Long-Term Care Insurance

Schwab has entered into a marketing agreement with SBIA, Inc. ("SBIA") to offer life insurance (term and permanent), disability insurance, and long-term care 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 typically 50% of the first-year and renewal commissions paid to SBIA, including production bonus and override received on each policy, net of all chargebacks.

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Fixed Income Securities 

When an investor buys or sells a bond or certificate of deposit (“CD”), Schwab may act as agent or principal. Acting as an agent means Schwab executes trades on behalf of clients in the secondary market and does not purchase or sell from its own account when trading for clients. Acting as a riskless principal means that Schwab, after having received an order from a client to buy or sell, purchases or sells the same security for its own account to offset the contemporaneous transaction with the client. Schwab profits from the markup or markdown or spread when it purchases or sells those securities in the secondary market. Schwab may also act as risk principal, which occurs when Schwab participates in a selling group or enters into a distribution agreement that gives us and our clients access to new issue bonds or CDs. Schwab receives a selling concession when participating in selling groups or entering into distribution agreements, as described below, which is paid by the client and reflected in the overall price of the security. Schwab’s customary selling concession, which does not differ among members of the selling group, ranges from less than 0.01% to 2% of the par value, or face amount, of the security, depending on the product. Schwab does not act as both principal and agent simultaneously in the same transaction.

 

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Structured Products

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 0.25% to 3.5% of the par value, or face amount, depending on the structured product.

Futures

Schwab does not trade futures and is not a Futures Commission Merchant. However, for clients who have a desire to trade futures, Schwab has a referral relationship with a Schwab affiliate. Per the terms of the referral relationship, Schwab receives a one-time introduction fee for each client referred to the affiliate.

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Schwab 529 College Savings Plan and Schwab Learning Quest Education Savings Program

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").

The portfolios available for purchase under the Schwab 529 Plan are managed by American Century as the Program Manager and are based on asset allocation models devised by Schwab and composed of mutual funds selected by American Century. These funds must meet criteria set forth in an agreement between Schwab and American Century. The portfolios include American Century and other third-party funds, as well as Schwab Affiliated Funds. Schwab receives a fee from American Century for providing services to Schwab clients invested in the Schwab 529 Plan. This fee is based on total assets held in the Schwab 529 Plan, other than in Schwab Affiliate Funds.

The Learning Quest program is composed of American Century Funds and Vanguard Funds selected by American CenturyThe Learning Quest program is composed of American Century Funds and Vanguard Funds selected by American Century as the Program Manager. The Learning Quest program is no longer available for purchase at Schwab, but Schwab receives a fee from American Century for providing services to Schwab clients invested in Learning Quest. This fee is based on the total assets held by Schwab clients in the Schwab Learning Quest plan and the average account size.

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Cash Awaiting Investment

Schwab and its affiliate Charles Schwab Bank also receive compensation as a result of cash awaiting investment in your account. Please refer to our Cash Features Disclosure Statement at schwab.com/cashfeaturesdisclosure.


Compensation Related to Investment Advisory Services

A Schwab representative may recommend any of the portfolio management services below. Although it depends on a variety of factors, including the amount and type of investments in a client’s account, generally speaking, Schwab earns the most compensation when a client invests with a Schwab-affiliated manager, Schwab Private Client™, or Schwab Managed Portfolios™ – Mutual Funds. When a representative recommends one of those portfolio management services rather than another, or recommends a portfolio management service over holding individual securities in an unmanaged account, this creates a material conflict of interest for the firm because it can earn more money. The conflict of interest is mitigated, however, because we pay our representatives in a neutral manner and because they are trained to make recommendations in a client’s best interest.


  • Schwab Intelligent Portfolios®. Clients receive (i) Schwab Wealth Investment Advisory ("SWIA") program administration services; (ii) CSIA's portfolio management services; and (iii) Schwab's trade execution, custody, and related services. Clients do not pay a program management fee. However, Schwab affiliates do earn revenue from the underlying assets in client accounts. This revenue comes from (i) revenue earned by Schwab Bank on the cash allocation in the investment strategies; (ii) advisory fees received by CSIM from Schwab ETFs that CSIA selects to buy and hold in client accounts; (iii) fees received by Schwab from third-party ETFs in client accounts for services Schwab provides to them as participants in ETF OneSource; and (iv) remuneration Schwab may receive from the market centers where it routes ETF trade orders for execution. If this affiliate compensation ever exceeds 0.30% of a client's assets, SWIA refunds the additional amount to client accounts or uses it to pay account administrative expenses.
  • Schwab Intelligent Advisory™ ("SIA"). Clients will be charged an annual fee of 0.28% of total client assets enrolled in the SIA Program, excluding cash ("SIA Program Fee"), with a quarterly cap of $900 across all SIA accounts combined together for billing purposes. The SIA Program Fee includes the following services: (i) planning services delivered by the Planning Consultants; (ii) ongoing access to financial planning tools; and (iii) administration services related to the SIA Program.
  • Schwab Managed Portfolios ("SMP"). SMP offers clients a diversified portfolio of either mutual funds or ETFs in a single account. Clients pay Schwab a program fee on non-cash investments for Schwab to act as the qualified custodian for SMP accounts and to provide execution, reporting, administration, and related services for SMP accounts; and for CSIA's management of SMP accounts on a discretionary basis consistent with clients' chosen investment allocations. Program fees range from 0.90% down to 0.20% depending on the strategy a client selects and the amount invested. Schwab or its affiliates earn revenue from the underlying assets in client accounts. This revenue comes from (i) revenue earned by Schwab or its affiliates on cash; (ii) advisory fees received by CSIM from Schwab mutual funds or ETFs that CSIA selects to buy and hold in client accounts; (iii) shareholder servicing fees received by Schwab from mutual funds that participate in Mutual Fund OneSource; and (iv) remuneration Schwab may receive from the market centers where it routes ETF trade orders for execution.
  • Schwab Managed Account Services™. The Select program features discretionary account management services by money managers ("MMs") unrelated to Schwab. The Schwab Managed Account Connection® ("Connection") program features discretionary account management services by the following Schwab Affiliates: CSIM, ThomasPartners, Inc. and Windhaven Investment Management, Inc. . Schwab and its Affiliates make more money when a Schwab representative recommends one of the affiliated managers as compared to recommending a third-party manager. This is a Material Conflict of Interest for the firm. Schwab charges a program fee which covers the MM's asset management services, as well as one or more of the following services provided by Schwab: (1) execution of transactions in equity securities, ETFs, exchange-traded notes, and agency transactions in fixed income securities; (2) custody of account assets; (3) program administration; (4) monthly account statements; (5) quarterly performance reporting; and (6) the services of a Schwab representative relating to program accounts. The program fee for Select and Connection ranges from 1.35% to 0.35% on the first $500,000 (depending on the MM and strategy) to as little as 1.05% to 0.25% on assets over $10 million.
  • Schwab Advisor Network ("SAN"). Through SAN, Schwab refers individual investors to independent investment advisors, who provide a wide range of financial planning and wealth management services. Clients do not pay Schwab a fee for the service. However, SAN advisors pay a quarterly fee (the "Participation Fee") to Schwab to participate in the service, and Schwab receives additional compensation from trading activity in Schwab accounts managed by the SAN advisor. The Participation Fee has a sliding scale that starts at 0.25% of the assets attributable to the referral made by Schwab.
  • Schwab Private Client ("SPC"). SPC is a fee-based program that combines ongoing non-discretionary investment advice with trade execution, asset custody, and other brokerage services. The provision of non-discretionary investment advice within SPC, including but not limited to recommendations about how to allocate assets and whether to buy, sell, or hold particular securities in accounts enrolled in SPC, is delivered exclusively by Schwab Private Client Investment Advisory, Inc. ("SPCIA"), an affiliate of Schwab and a registered investment advisor.

Schwab's fee ranges from 0.90% to 0.30% on non-fixed income assets and from 0.70% to 0.15% on fixed income assets, depending on the level of client assets enrolled in SPC. In addition to the SPC fee and Schwab's standard commissions, charges, and fees, Schwab and its affiliates (with the exception of SPCIA) earn money or receive benefits in other ways when executing or effecting recommendations that you may choose to implement as a result of advice you receive in SPC. The compensation and benefits are described above in the sections titled "Equities and Option Trade Execution," "Mutual Funds," "Exchange-Traded Funds," "Fixed Income Securities," and "Annuities."

REG99430-00 (11/17)