How Schwab Gets Paid
By J.R. Robinson, Founder/Financial Planner
Charles Schwab is the primary custodian we use for client investment accounts. We believe Schwab is an excellent fit for our clients because it provides secure custody, capable technology, broad investment access, and excellent service at remarkably little direct cost.
That does not mean Schwab works for free. The purpose of this article is to explain how the proverbial sausage is made, and, most importantly, to specifically explain how Financial Planning Hawaii clients pay to use Schwab’s trading platform and to avail themselves of Schwab’s custodial services.
To begin, Schwab is a publicly traded, for-profit company. That means that its sources of revenue and earnings are publicly disclosed. See Schwab’s 2025 financial results
In 2025, Schwab generated approximately $23.9 billion in net revenue. Its largest revenue sources were net interest revenue, asset management and administration fees, trading revenue, and bank deposit account fees. According to Schwab’s year-end results, these categories produced $11.75 billion, $6.51 billion, $3.92 billion, and $977 million, respectively.
Understanding how Schwab gets paid helps explain why it can offer so many services without directly charging clients (or RIAs) an explicit custody fee. It also reveals why our approach to investing generally results in our clients contributing very little to most of these categories, which is a big reason why we believe Schwab is an excellent fit for Financial Planning Hawaii.
Interest on Client Cash
Schwab’s single largest revenue source is net interest revenue.
When uninvested cash is held in a Schwab bank-sweep program, the cash may be deposited with an affiliated Schwab bank. The bank can invest those deposits or use them to make loans. Schwab earns the difference between what it receives on those investments and loans and what it pays depositors. This difference is commonly called the net interest spread.
Schwab is entirely candid about this arrangement. Its cash disclosure states that affiliated banks expect to earn more by lending and investing client cash than Schwab and its affiliates would earn from managing money market funds. It also discloses that rates on bank-sweep balances may be set as low as possible, subject to prevailing market and business conditions. Schwab Cash Features Disclosure Statement
This is why investors should not assume that cash appearing in a brokerage account automatically earns a competitive yield. The default bank-sweep rate may be considerably lower than the yield available from a purchased money market mutual fund, Treasury bill, or other short-term investment.
As most of you know, we regularly monitor client cash and generally do not leave material amounts sitting indefinitely in low-yielding sweep arrangements. Sue Gabor, CFP is my right-hand person at FPH, and part of her responsibilities include reallocating low interest cash deposits into higher yielding money market funds and CDs.
Margin Interest
Schwab also lends money directly to clients through margin accounts. Margin allows an investor to borrow against securities held in an account. Schwab charges interest on the loan, with the rate generally declining as the amount borrowed increases.
As of August 2026, Schwab’s posted rates for smaller margin balances were in the double digits. Its published example showed that a $10,000 margin loan at 11.825% could generate approximately $1,255 of interest over one year. Here is a link to Schwab’s margin rates and requirements
Margin can magnify gains, but it also magnifies losses. A falling market can force an investor to deposit additional money or sell securities at an especially bad time. The interest expense also creates a substantial hurdle that the borrowed investments must overcome.
We discourage our clients from using margin for investment speculation. As a result, Schwab generally earns little or no margin interest from our client relationships.
Payment for Order Flow and Trading Revenue
Online trades in most listed stocks and exchange-traded funds carry no commission at Schwab. Nevertheless, Schwab can still earn money when clients trade.
One source is payment for order flow. Schwab routes many client orders to market makers and other liquidity providers that execute the trades. Those firms may pay Schwab a rebate for the order flow. Schwab says these payments help offset the cost of processing trades and support its ability to offer very low commissions. It also states that execution quality takes priority when routing orders. Here is a link to Schwab’s order-routing disclosure.
Schwab also earns commissions and contract fees on certain transactions, including options, futures, some mutual funds, and broker-assisted trades. Its trading revenue includes commissions, payment for order flow, and revenue from principal transactions.
The more frequently customers trade, the more opportunities Schwab has to generate this revenue.
This helps explain the business value of sophisticated trading platforms such as Schwab’s Think-or-Swim. The platform provides advanced charting, real-time data, options analysis, alerts, and other tools designed to make trading easier and more engaging. It is an impressive platform for active traders. It is not especially relevant, however, to investors following a patient, long-term financial plan.
We discourage active trading because decades of evidence suggest that frequent trading is more likely to subtract value than add it. Our clients may occasionally trade to invest new cash, raise funds for spending, harvest tax losses, or make a meaningful portfolio adjustment. Trading itself is not the investment strategy.
Automatic rebalancing also inherently increases trading volume. While it is deployed by legions of financial advisors, the empirical support for the merits of auto-rebal in the academic research literature is unconvincing, so we don’t use it either.
Fixed-Income Trading
Bonds are another source of revenue for Schwab.
When Schwab acts as an agent, it may charge a disclosed transaction fee. When it acts as principal, Schwab buys or sells a bond from its own inventory and serves as the counterparty to the client. In that situation, the price may include a markup, markdown, or bid-ask spread.
These costs are not always displayed as a separate commission. Schwab’s pricing guide explains that when it acts as principal, the bond price can include both its transaction fee and a markup reflecting the bid-ask spread. The markup may not be subject to a stated minimum or maximum. Schwab Pricing Guide
This does not mean Schwab’s bond pricing is necessarily unreasonable. It means that “commission-free” should not be confused with “cost-free.” Investors buying individual bonds should compare yields and prices rather than focusing solely on the stated commission.
We buy millions of dollars of new issue CDs and treasuries for clients every year. For CDs, the issuing banks typically pay Schwab and other broker-dealers a distribution fee for offer their CDs to Schwab customers. Treasuries typically have extraordinarily narrow bid-ask spreads, so there is not much juice there for Schwab from our business volume.
Mutual Fund and Asset-Management Fees
Schwab earns asset-management fees from its proprietary mutual funds, exchange-traded funds, and money market funds. It also receives recordkeeping, shareholder-service, and administrative fees from some third-party mutual fund companies whose funds are offered through Schwab.
For many transaction-fee mutual funds, Schwab reports receiving an asset-based servicing fee that is typically about 0.10% annually, although the amount can be higher. Schwab’s mutual fund compensation disclosure
Clients do not ordinarily see these payments deducted as separate line items. They are generally reflected in a fund’s expense ratio or paid by the fund company.
As most FPH clients know, we are big fans of Vanguard’s passively managed index funds and ETFs. Because Vanguard does not pay Schwab any servicing fee, investors who purchase or sell Vanguard mutual funds pay a $45 ticket charge. However, since Schwab does not charge any commission on stock transactions we tend to use Vanguard ETF version of its index funds instead.
For the S&P 500 Index, we use Schwab’s fund (SWPPX) because it has follows same capital market weighted index as Vanguard’s Index 500 (VFIAX) and Schwab’s Index has an expense ratio of just 2 basis points (.0002%) vs 4 basis points for Vanguard.
Schwab’s Money Market Funds Are the Primary Source of Revenue From Our Clients
The primary way Schwab makes money from our client relationships is through the management fees charged by Schwab money market mutual funds.
We frequently use Schwab money market funds for cash that needs to remain safe and liquid. Like all money market funds, Schwab’s invest in high-quality, ultra-short-term securities and are tasked with maintaining . Schwab charges a management fee through the fund’s expense ratio. The reported yield is net of the fund’s expenses, so the client receives the published yield after those costs have been deducted.
Schwab is transparent and upfront in disclosing that its money market funds are an important profit center for the firm. The amount of this fee above the funds’ operating expenses is generally in the .15%-.25% range, depending on the fund and the share class. Schwab Ultra Shares, which require a one-time minimum investment per account of $1,000,000, have lower management expenses than Schwab’s regular retail money market funds. Clients receive professional cash management, daily liquidity, and a market-based yield, that is generally competitive with rates consumers might find in high-yield online savings accounts.
It is also important for consumers to understand the distinction between purchased money market funds and low-yielding bank-sweep cash. Schwab has eliminated money market funds as the automatic sweep feature for most accounts. Consequently, purchasing a money market fund often requires an affirmative transaction to purchase (and sell). That is where Sue steps in. See also: Schwab money market funds
Nothing in Life Is Free, But We Believe Our Clients Receive Excellent Value From Having Their Accounts With Schwab
Make no mistake, Schwab is a for-profit company, and your accounts at Schwab are not “free.”
As your financial planner, I am held to a fiduciary standard of conduct. Part of my responsibility is to avoid potential conflicts of interest wherever possible and to disclose all potential conflicts and potential fees and expenses that are not avoidable.
As described above, the most obvious conflict of interest pertains to Schwab’s use of low/no-interest bank deposit sweep accounts as a source of revenue. We proactively strive to reduce the amount of cash that is earning little or nothing by reallocating cash to money market funds.
In our experience, Schwab’s money market funds tend to pay higher yields than most local bank deposits and are generally competitive with the yields offered on high-yield savings accounts and CDs offered by online banks.
Because we discourage active trading and margin borrowing, avoid habitual automated rebalancing, and monitor idle cash, Schwab earns relatively little from these revenue generators from most of our client accounts. Its primary compensation from our relationships comes from the vig Schwab extracts from its money market funds.
When interest rates are low, as they were in 2005 and the beginning of 2026, we had more than $100,000,000 of client assets in Schwab money market funds. 15-25 basis points on that amount of assets explains exactly how Schwab is happy to have FPH on its platform.
As interest rates rise, we shift client assets from money market funds to CDs, which are less profitable for Schwab. However, throughout the cyclical ebbs and flows of client assets into and out of Schwab money market funds, it should be clear that Schwab is very definitely profiting from our client relationships.
In return, our clients receive custody, account statements, tax reporting, online access, trading capabilities, research, fraud controls, and a national service infrastructure at little direct cost.
That is a tradeoff we regard as favorable an resaonable for all parties. Schwab does not need to be free. It simply needs to provide excellent value while allowing us to recognize and manage the conflicts built into its business model.
And that is how the sausage is made.