Limitations and conflicts
This is where you can find more information about (1) the limitations that apply when Charles Schwab & Co., Inc. ("Schwab" or "we"), acting as a broker-dealer, makes recommendations to open up an account or to buy, sell, or hold any investment or to pursue an investment strategy (each a "recommendation"), and (2) how Schwab makes money and the conflicts related to those recommendations. Because we want you to be confident that the recommendations you receive from Schwab are right for you, we urge you to read this document carefully and in conjunction with the rest of our Best Interest Disclosure at schwab.com/best-interest.
Schwab and its representatives can earn different amounts of money based on the recommendations we make to you. This means we have conflicts of interest. Everything you read here applies to recommendations our representatives make to investors like you. Examples include situations where a Schwab representative recommends that you:
- Buy, sell, or hold a security; open an account at Schwab; or invest using a particular strategy.
- Enroll in an investment advisory or portfolio management service in which you pay an ongoing fee or separate fee for investment advice and account monitoring.
- Roll over funds from an employer-sponsored retirement plan such as a 401(k) into an IRA, or transfer an IRA from another firm to Schwab.
Although we are required to act in your best interest for all recommendations we make to you, what you read here does not apply to the investment advice that we provide through one of our investment advisory or portfolio management services. The specific and different limitations and conflicts applicable to these services are described in our Investment Advisory Client Relationship Summary, which can be found at schwab.com/relationship-summary-ia. Additional information about retirement accounts is below.
Unless we otherwise agree with you in writing, our Schwab representatives will be acting in a broker-dealer capacity when they make recommendations. That means that we do not monitor your account(s) or investments unless we specifically agree to do so in writing and that we therefore have no obligation to update an investment recommendation, financial advice, or financial plan we give you. Any recommendation, financial advice, or financial plan only applies at the point in time we provide it to you. Schwab representatives can only recommend accounts or account features that are available at Schwab.
Schwab has established limitations on the recommendations our representatives can give and the investment products they can recommend. These limitations are designed to improve the quality of the recommendations we provide and to ensure that our representatives understand the investments, accounts, and strategies they are recommending. Although you can purchase thousands of investment products on your own at Schwab, our representatives can only recommend a small subset of these.
When Schwab representatives formulate recommendations to buy a security, they follow lists or criteria, which can be thought of as menus of alternatives available for them to recommend. Schwab representatives can generally recommend holding or selling any investment based on a client's needs and circumstances, using pre-evaluated solutions or strategies as described below.
Schwab policies also limit the kinds of investment strategies that Schwab representatives can recommend. Recommendable strategies must abide by the Asset Allocation requirements described below, and any buy, sell, or hold activity that is recommended as part of the strategy must independently satisfy the requirements described here.
1. Asset allocation: Schwab representatives can recommend a security, investment product, or account type along with an asset allocation model portfolio that is 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.
2. Equities: Schwab representatives can 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 can 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 can recommend purchases if the 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.
3. Options: Schwab representatives can 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 can 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.
4. Mutual funds: Schwab representatives can recommend the purchase of any mutual fund that appears on a Schwab-maintained mutual fund recommendable list or, for mutual funds already owned and are evaluated favorably by Schwab affiliates.
Schwab's affiliate Charles Schwab Investment Advisory, Inc. ("CSIA") creates a mutual fund recommendable list based on parameters approved by Schwab that includes 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 as to include eligible Schwab Affiliate Funds and third-party mutual funds that participate in the Schwab Mutual Fund OneSource® service (Schwab's platform of over 4,300 no-load, no-transaction-fee mutual funds), as well as other no-transaction fee ("NTF") funds and transaction fee funds. For example, unlike third-party funds, Schwab Affiliate Funds are recommendable for their first 12 months after launch. Also, our recommendable list parameters reserve at least one spot in each category for Schwab Affiliate Funds and funds that participate in the Schwab Mutual Fund OneSource service. As explained below, Schwab or its affiliates earn more money when clients purchase and hold OneSource and Schwab Affiliate Funds.
5. Exchange-traded funds: Schwab representatives can recommend the purchase of any ETF that appears on a Schwab-maintained ETF Recommendable List.
Schwab's affiliate CSIA creates an ETF recommendable list based on parameters approved by Schwab that include both quantitative and qualitative eligibility criteria, which are largely the same for Schwab Affiliate ETFs and unaffiliated ETFs, with the exception that only Schwab Affiliate ETFs are eligible for inclusion on the ETF recommendable list for their first 12 months post-launch. Although CSIA itself does not receive any compensation from Schwab Affiliate ETFs, Schwab has designed some of these criteria so as to include Schwab Affiliate ETFs. As explained below, Schwab or its affiliates earn more money when clients purchase and hold Schwab Affiliate ETFs.
6. Fixed income: Schwab representatives can 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.
7. Cash: Schwab representatives can recommend that clients allocate cash based on two categories of client cash needs:
- Savings and Investment cash: (1) saving for known obligations, an upcoming milestone, or an emergency fund, or (2) longer-term cash investment as part of a strategic asset allocation; and
- Everyday cash: readily available for purchasing investments or managing day-to-day transactional needs such as paying bills and expenses.
Depending on the need, Schwab representatives can recommend many different kinds of cash investment alternatives. If they are recommending purchased money market funds, they are restricted to Schwab Affiliate Funds, which are the only such funds available at Schwab.
8. Credit products and margin: Schwab representatives can recommend pledged asset lines of credit, mortgages, and home equity lines of credit offered by Charles Schwab Bank, SSB ("Charles Schwab Bank"). Schwab representatives can also recommend the use of margin loans for the purpose of buying securities or for alternative uses.
9. 529 plans: Schwab representatives can 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, state tax benefits, estate planning considerations, and the client's need for flexibility and/or control.
The only 529 plan currently available for new accounts at Schwab is the Schwab 529 College Savings Plan (the "529 Plan"), for which Schwab receives remuneration. The 529 Plan is sponsored by the state of Kansas and managed by American Century Investment Services, Inc. Depending on the client's individual circumstances (in particular, state of residence), Schwab representatives may not be able to provide a 529 plan recommendation.
10. Annuities: Designated Schwab representatives with an insurance license can 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 sub-accounts (in the variable annuity products), the product fees and expenses associated with each annuity, client service reputation, and the industry ratings and financial condition for each provider.
11. Rollover advice, transfers, and account conversions: Schwab representatives provide information about rolling over assets from a retirement plan to a Schwab IRA, transferring an IRA to Schwab IRA from another custodian, and converting a Schwab brokerage IRA to a Schwab IRA enrolled in one of our managed offers. If a Schwab representative recommends one of these actions, and you accept that recommendation, then the representative will earn money, which creates an incentive for them to make such recommendations. If a representative recommends a transfer, you could incur higher costs for certain recommended products and services. In the event a Schwab Representative recommends that you convert an existing brokerage IRA account to a Schwab IRA managed under one of its investment advisory programs, then you will incur an ongoing fee, irrespective of the amount of trading activity in your account.
12. Investment advisory services: Schwab representatives can 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"); when a representative makes such a recommendation, the representative is acting in an investment advisory capacity that is described in more detail in our investment advisory brochures. All recommendations regarding our investment advisory services will be made in an investment advisory capacity. You will know we are acting as an investment adviser because it is a distinct service that you select and you will receive a special written disclosure and, often, enter into a separate agreement with us to receive that service. Schwab-sponsored and Schwab-affiliated investment advisory wrap fee programs include: (1) Schwab Wealth Advisory™, with non-discretionary management provided by Schwab affiliate Schwab Wealth Advisory, Inc. (SWAI); (2) Schwab Managed Portfolios, with discretionary mutual fund and ETF portfolios managed by Schwab affiliate Charles Schwab Investment Management, Inc. ("CSIM"); (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 CSIM; (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 for a quarterly fee.
Schwab selects unaffiliated portfolio managers based on parameters and due diligence maintained and approved by Schwab and implemented by CSIA. Affiliated portfolio managers are not subject to any specific hiring or retention criteria, but they are subject to the formal oversight of Schwab and they are reviewed on a regular periodic basis by a third-party firm hired by Schwab to assess their operational soundness across criteria provided by Schwab. Unaffiliated managers in SAN are subject to participation criteria, including investment experience requirements; acceptance of the SAN program's fee structure and account minimums; and periodic review of certain compliance practices by a third-party firm hired by Schwab. 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. Additional information about these programs can also be found at schwab.com/advisory.
Material conflicts of interest created by how Schwab makes money
Schwab is a large broker-dealer and investment adviser that offers and recommends its own services and the products and service of its affiliates, which include banks and registered investment advisers to mutual funds, ETFs and wrap fee programs. Schwab and its affiliates earn more money when you accept some of our recommendations, including recommendations to purchase products or avail yourself of services created or managed by Schwab or one of its affiliates. Therefore, we have conflicts of interest due to the financial incentive to recommend products and services where we make the most money. You should understand these conflicts because they can affect the recommendations we provide to you. We mitigate the firm's conflicts of interest based on how we pay our representatives to help you. For example, our representatives do not earn more or less for recommending an affiliated mutual fund, a third party ETF, a bond, or a cash product. For details please see schwab.com/representative-compensation.
Schwab makes money both directly and indirectly. An example of how Schwab makes money directly is from direct commissions or transactions fees that you pay us for brokerage services. These are described in schwab.com/pricing-guide. Below we describe ways in which Schwab and its affiliates earn money indirectly from investments held in your accounts.
For more information on how individual Schwab representatives are paid, please go to schwab.com/representative-compensation.
Order routing and 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, and also routes orders directly to major exchanges, including the Members Exchange (MEMX), in which Schwab has ownership interest.
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, the likelihood of execution when limit orders become marketable, 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.
Schwab receives remuneration, such as liquidity or order flow rebates, from market venues to which orders are routed, and also pays fees for execution of certain orders. Quarterly information regarding the market venues to which we route orders and remuneration received is available on our website at schwab.com/legal/order-routing or in written form upon request. Information regarding the specific routing destination and execution time of your orders for up to a six-month period is also available upon request.
Schwab may execute fixed income orders for customers as agent or as principal. If we execute your fixed income trade as principal we will earn a dealer "mark-up" or "mark-down" on the trade that is built into the price of the security. For new issue purchases of fixed income securities where Schwab was a distribution participant or member of the selling group – we will earn a dealer concession that is similarly built into the price of the security.
In the bond market, there is no centralized exchange or quotation service for most fixed income products. Prices generally reflect activity by market participants or dealers linked to various trading systems. A small number of corporate bonds are listed on national exchanges. Although Schwab seeks access to major trading systems, exchanges, and dealer markets in an effort to obtain competitive pricing, at any given time it is possible that securities could be available through other trading systems, exchanges, or dealers at superior or inferior prices compared to those available at Schwab. All prices are subject to change without prior notice.
Schwab only recommends Schwab Affiliate money market funds managed by Charles Schwab Investment Management, which earns a management fee that increases with more assets in the fund. Schwab also only recommends savings and checking accounts from Charles Schwab Bank, an affiliated bank. Clients on their own may find higher rates at other banks or savings institutions.
Schwab has a "Cash Features Program" which is a service that automatically invests, or "sweeps," the "Free Credit Balance" (generally your uninvested cash) in your account into a liquid investment to earn interest. Most clients and most accounts default into the "Bank Sweep" feature using one or more banks affiliated with Schwab, collectively, the "Affiliated Banks," whose deposits are insured by the Federal Deposit Insurance Corporation.
Interest rates under the Bank Sweep feature are established periodically by the Affiliated Banks, which may seek to pay as low a rate as possible consistent with their views of prevailing market and business conditions.
Note that retirement and other benefit plan accounts will be paid a reasonable rate consistent with applicable legal and regulatory requirements.
The Affiliated Banks intend to use the cash balances they receive through Bank Sweep to fund current and new lending activities and investments. The Affiliated Banks' profitability on such loans and investments is generally measured by the difference, or "spread," between the interest rate paid on Bank Sweep deposit amounts and other costs of maintaining Bank Sweep, and the interest rate and other income earned by an Affiliated Bank on the loans and investments made with the funds that it receives through Bank Sweep.
Cash Features are not intended for long-term investments, and yields on any of Schwab's Cash Features are lower than those of similar investments or deposit accounts offered outside of the Cash Features Program. If you desire to maintain cash balances for other than a short-term period and/or are seeking the highest yields currently available, please contact your Schwab representative or visit schwab.com/cash for investment options that may be available outside of the Cash Features Program to help maximize your return potential consistent with your investment objectives and risk tolerance. For more information about the Cash Features Program and related conflicts of interest, please see the Cash Features Disclosure Brochure at schwab.com/legal/cash-features-disclosure-statement.
When clients invest in a mutual fund in a Schwab account, Schwab receives compensation from certain 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. For specific information you should review the particular prospectus or offering document for the fund or investment you select, which is available upon request and will be delivered to you at the time of purchase.
Certain fund sponsors or their affiliates, such as fund advisors, pay a flat fee to compensate Schwab for activities related to Schwab's sponsorship of its Mutual Fund Marketplace® platform. These payments are separate from and in addition to the fees specific to a particular share class that are described below. These flat fees can be based on any number of factors, such as the level of assets, purchases over a period, or net flows.
Schwab Mutual Fund OneSource® service and other no-transaction-fee funds
Through the Schwab Mutual Fund OneSource service, 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").
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 can be as high as 0.45%. The fee can be subject to a monthly minimum that generally does not exceed $2,000 and applies beginning with the first or seventh full month, depending on when the fund family joined the platform, 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. The amount of this fee generally does not exceed $25,000 for the first fund added and $3,000 for each additional fund within a fund family after that.
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 not otherwise included as part of the other NTF Funds described above.
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. In some cases, Schwab applies a minimum monthly fee of $1,000 per month per Fee Fund, depending on when the fund family was added to the platform. This minimum monthly fee is applied starting with the first full month after the fund is made available for purchase at Schwab and only if the asset-based fee calculated for the month is less than the minimum monthly fee. Some Fee Funds pay Schwab a set dollar amount per client account in lieu of the low asset-based fee, typically $20 per account, but which can range up to $25 per account annually (a "per-position fee").
When adding a new fund to Schwab's platform, Fee Funds also pay Schwab a one-time establishment fee. The amount of this fee generally does not exceed $25,000 for the first fund added and $5,000 for each additional fund within a fund family after that.
Generally, Schwab does not allow purchases into load funds, but will accommodate redemptions out of these funds and when the shares are held in a Schwab account. Load funds pay Schwab fees for shareholder services.
Schwab affiliate funds
Schwab currently has two affiliated mutual fund families: Schwab Funds® and Laudus Funds® (collectively, "Schwab Affiliate Funds"). Schwab's affiliate, CSIM, serves as investment adviser and/or administrator to both fund families. These Schwab Affiliate Funds pay CSIM a fee for investment advisory and/or administrative 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, certain of the Schwab Funds and Laudus Funds pay Schwab an asset-based fee for the shareholder services that Schwab provides.
Some Schwab Funds have adopted a shareholder servicing plan pursuant to which they pay fees to Schwab for shareholder services ranging up to 0.25% annually. Also pursuant to this plan, some Schwab Money Market Funds pay Schwab up to 0.15% annually for shareholder services and, with respect to sweep shares of the money funds, up to an additional 0.15% annually for sweep administrative services Schwab provides to shareholders invested in sweep shares of the money funds. The Schwab Target Funds, Schwab Target Index Funds, Schwab Balanced Fund™, Schwab® Monthly Income Funds, Schwab Equity Index Funds, and Schwab Bond Index Funds do not make any payments to Schwab under a shareholder servicing plan. Many of the Schwab Funds have adopted a unitary fee structure under which a single fee is paid to CSIM, and out of which CSIM pays for certain services provided to the funds; CSIM and its affiliates are entitled to retain any portion of this fee not paid out to a service provider. Laudus Funds pay a fee ranging up to 0.10% annually for the shareholder services that Schwab provides. 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. For more information please see Schwab Mutual Fund prospectuses available at: schwabfunds.com/prospectus.
Other fees from mutual fund sponsors
On or about February 1, 2022, Schwab entered into a long-term strategic relationship with T. Rowe Price. Under this arrangement, T. Rowe Price makes payments to Schwab in exchange for Schwab promoting certain actively managed T. Rowe Price funds to Schwab's clients, and for providing additional marketing support to T. Rowe Price. This payment will be significant, and will increase over each year of the relationship if Schwab is successful in promoting T. Rowe Price funds, depending upon asset growth in the T. Rowe Price Funds at Schwab. Schwab expects to receive payments from T. Rowe Price during the first year of the arrangement of between $8 and $10 million, but this payment may be higher or lower depending on growth of T. Rowe Price assets at Schwab. This strategic relationship payment is in addition to and separate from payments T. Rowe Price makes to Schwab for shareholder and administrative services discussed in the paragraphs below elsewhere in this section.
Because the terms of the arrangement provide a considerable financial benefit to Schwab, this arrangement creates conflicts of interest as T. Rowe Price will have greater access to Schwab representatives and advisors that custody their clients' assets at Schwab, and Schwab will promote T. Rowe Price funds to our clients on schwab.com and other digital properties. Clients may be more likely to select, and Schwab representatives or advisors that custody their clients' assets at Schwab may be more likely to recommend, funds that are familiar to them and that receive greater promotional support. The Strategic Provider Program will not impact selection of any fund on the Mutual Fund OneSource Select List or other tools and lists prepared by Schwab. In addition, the compensation received by Schwab representatives will not differ based on whether the fund is from a Schwab Affiliated, third-party, or strategic provider.
In addition to the fees described above, Schwab can earn additional compensation from certain mutual funds for the administrative services Schwab provides in connection with various event sponsorship or marketing opportunities. The amount of such fees varies depending on the type and number of opportunities in which the fund participates.
Exchange-Traded Funds ("ETFs")
Schwab's affiliate CSIM serves as investment adviser to 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. Third-party ETF sponsors or their affiliates make payments to Schwab for ETF-related opportunities such as education, events, and reporting. Schwab does not receive payment to promote any particular ETF to its customers. For specific information you should review the particular prospectus or offering document for the fund or investment you select, which is available upon request and will be delivered to you at the time of purchase. Prospectuses for Schwab ETFs can be found here: schwabfunds.com/prospectus.
Active Semi-Transparent (Also Known as Non-transparent) ETFs
When clients invest in a third-party active semi-transparent ETF in a Schwab account, Schwab receives compensation from third-party active semi-transparent ETFs or their sponsors for platform support and technology, shareholder communications, reporting, and similar administrative services for third-party active semi-transparent ETFs available at Schwab. Schwab only offers third-party active semi-transparent ETFs if Schwab receives compensation from the ETF or its sponsor. The fee will vary, but typically is an asset-based fee of 0.10% per annum of the assets held at Schwab. To the extent that any part of the fees described are paid by ETF sponsors out of fund assets, those amounts are included in the ETF's operating expense ratio ("OER"), which means they are indirectly borne by the fund's shareholders.
Schwab 529 Education Savings Plan and Learning Quest®
Education Savings Program
The Schwab 529 Education 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. Schwab and the Plan's Program Manager, American Century Investment Management, Inc., have designed the investment strategy and investment options to require or favor the selection of Schwab-affiliated funds, American Century funds, and certain third-party mutual funds that have a business relationship with Schwab or American Century. Accordingly, there is a conflict of interest in the selection of the funds for the portfolios because Schwab, a Schwab affiliate, or American Century, respectively, earn more revenue as a result.
Schwab receives a fee from American Century for providing services to Schwab clients invested in the Schwab 529 Plan. For the portfolios composed of actively managed funds, this fee is based on total assets held in the Schwab 529 Plan, other than Schwab Affiliate Funds, less a program cost allocation retained by American Century. Schwab receives no service fee from American Century for assets held in portfolios composed of index or passively managed funds.
The Schwab 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 Schwab 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.
Schwab has annuity selling agreements in place with 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. Schwab’s compensation is based on a percentage of premiums paid by the client or on a percentage of the client’s account value. Compensation to Schwab is generally made in the form of an upfront payment only or an upfront payment followed by a “trail commission” which is paid to Schwab for a certain period of time. Although compensation varies significantly among the insurers and the types of annuities, the maximum upfront commission paid to Schwab is 5.50% and the maximum “trail commission” is 1.00%.
- Variable Annuities: Schwab's compensation generally consists of an annualized commission, which is calculated and paid monthly or quarterly based on the average asset value of the annuity contracts. The maximum annualized variable annuity commission paid to Schwab is 0.50%. As an alternative to commission, at least one company currently compensates Schwab for marketing services. To the extent variable annuity assets are invested in a variable subaccount managed by CSIM, as adviser to the Schwab Funds and Schwab ETFs and an affiliate of Schwab, Schwab and its affiliates earn additional compensation. These Schwab Funds and Schwab ETFs pay CSIM a fee for investment advisory and/or administrative services, the amount of which is described in the funds’ prospectuses.
- Fixed Deferred Annuities: Schwab's compensation is a commission percentage of the initial purchase payment amount. The commission rate will vary based on the fixed deferred annuity contract purchased, and length of surrender charge period chosen. The maximum gross commission payable on a fixed deferred annuity is a 5.50% upfront commission.
- Registered Index-Linked Annuities: Schwab's compensation is a combination of upfront commission and annualized trail commission. The commission rate and type will vary based on the contract purchased and age at time of purchase. The maximum gross commission payable is a combination of 1.0% - 3.0% upfront commission and 1.00% trail commission, which can begin in year 2 or year 4, depending on the contract.
- Immediate Income Annuities: Schwab's compensation is either an upfront commission based on the initial purchase payment amount or a combination of upfront commission and annualized trail commission. The commission rate and type will vary based on the type of immediate income annuity contract purchased and the income option selected. The maximum gross commission payable on an immediate income annuity is a 4% upfront commission or a combination of 2.5% upfront commission and .20% - .25% trail commission.
- Deferred Income Annuities: Schwab's compensation is either an upfront commission based on the initial purchase payment amount or a combination of upfront commission and annualized trail commission. The commission rate and type will vary based on the type of deferred income annuity contract purchased and the income option selected. The maximum gross commission payable on a deferred income annuity is a 5% upfront commission or a combination of 3% upfront commission and .30% trail commission or a .50% upfront commission and .50% trail commission.
- Indexed Annuities: Schwab's compensation is a combination of upfront commission and annualized trail commission. The commission rate and type will vary based on the type of the surrender charge period selected and age at time of purchase. The maximum gross commission payable is a combination of 2.5% upfront commission and .50% trail commission.
Fixed income securities
When an investor buys or sells a bond or certificate of deposit ("CD"), Schwab can 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. Schwab earns a commission on these transactions. When Schwab acts as principal, the bond price includes our transaction fee and can also include a markup that reflects the bid-ask spread and is not subject to a minimum or maximum. When trading as principal, Schwab may also be holding the security in its own account prior to selling it to you and, therefore, will make (or lose) money depending on whether the price of the security has risen or fallen while Schwab has held it. 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, 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 3% 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.
Initial public offerings and secondary offerings
When Schwab offers investment in an Initial Public Offering ("IPO"), Schwab clients must meet an asset threshold in their Schwab accounts and must participate in certain Schwab client segments or services in order to be eligible for IPO and secondary offering access. Please note that meeting such criteria does not guarantee that you will receive an allocation. Schwab does not receive a syndicate fee, or dealer concession, on sales of these new issues to Schwab clients.
Specific considerations for retirement accounts
In addition to the information provided below, all of the information about fees, material limitations and conflicts of interest above and in Our Best Interest Disclosure, which can be found at schwab.com/best-interest, also applies to Retirement Accounts1. This section provides additional information about how Schwab provides retirement investment advice to Retirement Investors2 under the Department of Labor ("DOL") guidance. If a Schwab representative is giving you investment advice (as defined under the Employee Retirement Income Security Act, or "ERISA") about a Retirement Account, we will act as fiduciaries under DOL guidance and within the meaning of Title I of the ERISA and/or the Internal Revenue Code, as applicable, which are laws governing Retirement Accounts.
This commitment applies to recommendations we make in response to your requests. If you want professional assistance in monitoring your Retirement Account, you can consider one of our portfolio management services that provides this type of ongoing support. For more information about those services, go to schwab.com/relationship-summary-ia.
When making recommendations for Retirement Accounts:
- Schwab and our representatives will only give you investment advice in your best interest, which means that we act as a fiduciary under ERISA, the Internal Revenue Code, or both (as applicable).
- When evaluating if a Plan1 rollover is in your best interest, among other factors, we will compare the costs associated with your current Plan and those you would likely pay at Schwab given your unique investment objectives. If you do not know or cannot obtain your Plan costs, your representative may approximate them by leveraging an industry benchmarking database which aggregates fees and expenses of comparable Plans across the marketplace.
- The compensation Schwab and our representatives receive when you follow our investment advice recommendation will be reasonable. We measure reasonableness by reviewing the value of our services and comparing market prices for similar services.
- When a Retirement Investor asks us questions about our investment advice, our answers will be straightforward and accurate.