Edward Jones Files to Dismiss Fee-Account Migration Suit
Edward D. Jones & Co.’s “extensive disclosures” about the costs and benefits of fee-based advisory versus commission accounts justifies dismissal of a purported class-action lawsuit that alleged it benefits from fee accounts at the expense of low-trading customers, it argued in a court filing last week.
The lawsuit in the generally investor-friendly federal U.S. Eastern District Court of California has been closely watched by brokerage firm officials and lawyers at a time when firms are pushing brokers and customers to migrate to fee-based accounts from traditional commission accounts. Firms generally prefer fee accounts because they generate revenue regardless of clients’ trading inclinations.
Jones’s “clear and robust written disclosures” informed customers in a “Making Good Choices’ brochure and other documents that choosing advisory programs “could be ‘more expensive over time’ than commissions” and that a “‘financial advisor will typically earn more over time’ under advisory programs,” Meryl Young, Jones’s lawyer at Gibson, Dunn & Crutcher wrote in the 20-page motion to dismiss filed on Nov. 21.
“Edward Jones (“EDJ”) offers multiple investment account options so that investors can choose the type of account that works best for them, and it provides extensive disclosures to help clients make their choices good ones,” she wrote. The plaintiffs failed “to show anything untrue or misleading about anything EDJ said (or did).”
Lawyers discussing fee-based versus commission accounts on Thursday at a New York State Bar Association conference on arbitration said they believe the plaintiffs will have difficulty convincing even a liberal California court to grant class-action status to widely disparate customers. But some also were skeptical of Jones’ broad arguments and its reliance on its disclosures as sufficient grounds for dismissal.
“I question whether the move to fee-based accounts by the industry was done to benefit customers,” said Robert Pearl, an employment and plaintiffs’ lawyer based in Naples, Fla. “What strikes me is that [Jones’ lawyers] argue full disclosure. How does that insulate a firm for conditions later on” that could change the balance of benefits offered by various accounts?
The challenge for lawyers who argue in so-called reverse-churning cases that customers who do little trading would pay less in commission accounts is finding data that has the same weight as turnover and other ratio-based measurements in churning cases, he and other panelists said.
John R. Garner, the Willows, Calif-based lawyer who filed the lawsuit against Jones last April, did not immediately respond to a request for comment on the motion to dismiss or on the lawyers’ comments.
Edward Jones was managing $360 billion of customer assets in advisory programs as of the end of this year’s third quarter, up 24% from a year earlier. Its net new assets collected by advisors jumped by 78% in three months ending September 28 to $16 billion from the year-earlier quarter, with the bulk going into fee-based accounts.
The firm generated $17.2 billion in revenue from asset-based fees between March 30, 2013 and March 30, 2018, according to an amendment complaint that plaintiffs in the purported class-action suit filed in September. ”Edward Jones’ business model has allowed it to have a stronghold among working-class individuals in small communities across the country, like Lead Plaintiffs, who were unsophisticated investors seeking professional investment guidance from someone with whom they could have a personal relationship,” it said.
In its motion to dismiss the complaint, Jones’ lawyers said the plaintiffs mischaracterized Jones’ motives for offering the accounts, included inaccurate facts about internal presentations and its fiduciary rule policies, and failed to make allegations of specific securities fraud.
In a regulatory filing earlier this month, Jones’ parent company said that it has settled a purported class-action lawsuit on behalf of branch officer administrators who alleged they were not paid for overtime. It also said that the Securities and Exchange Commission continues to investigate its sales practices involving mutual fund class shares.