Schwab Admitting Responsibility For Mis-Marketing Its Yield Plus Fund?


Recent actions by Charles Schwab in offering money to investors in its Yield Plus Bond Fund are tantamount to an admission that the fund was misrepresented to investors. Schwab had marketed the Yield plus Fund as a safe, conservative short-term bond fund that was a cash equivalent and offered low volatility. It was pitched as an alternative to a money-market fund. Yet the Yield Plus Fund has lost approximately 20% of its value over the past year.

With a marketing description such as that, it is obvious that Schwab routinely recommended the Yield Plus Fund to investors whose objectives were safety and preservation of capital. The Yield Plus Fund, however, was heavily invested in mortgage-backed securities and was clearly not a safe investment. The fund’s asset base peaked last year at $13.5 billion and had dropped to $1.5 billion earlier this month. The fund has had such poor results that even the Schwab Charitable Fund has withdrawn donor investments from the Yield Plus Fund.

According to Brooke Southall of Investment News, in response to reports that it is offering cash settlements to investors in Yield Plus Fund, Schwab issued a statement that included the following: “As a rule, we do not compensate investors for a decline in the value of securities.” Yet that is precisely what it appears to be doing. This admittedly unusual action by Schwab raises many questions among investors, including why should they accept an offer of five to 12 cents on the dollar when their actual losses are much higher. It looks like Schwab is trying to buy its way out of a massive liability disaster on the cheap.

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