Edward Jones, Raymond James Say Litigation Costs Likely to Soar

NiroDesign/IStock/Getty Images

Jones Financial Cos., the parent of mass-market brokerage giant Edward Jones, estimates that its unreserved potential legal costs have more than tripled in the past 12 months.

In its 2018 first-quarter regulatory filing, Jones put its estimated potential legal losses at $0 to $9 million.

Similarly, Raymond James Financial, which has 7,862 independent and employee advisors in its brokerage division, raised its estimate for unreserved legal costs 46% over the past year to a maximum of $110 million at the end of March from $75 million at March 31, 2018, according to its 10-Q filings.

Spokespeople for Raymond James, which drew 39% of its profit in the first three months of the year from its private client division, did not return a request for comment.

Raymond James in April settled for an undisclosed amount two customer class action claims alleging the firm failed to properly disclose fees in its self-directed, fee-based “Passport” accounts and continues to list those cases as potential legal liabilities.

Jones, which derives almost all of its revenue from its brokerage business, has been hit with a number of high-profile purported class-action legal claims in the past year, ranging from investors claiming that they were pushed from commission into more expensive fee-based accounts to former advisers making racial discrimination claims and wage claims that include charges of the firm suing them to recoup training costs and of not paying them for overtime.

Edward Jones, which has filed to dismiss some of the cases, said that it is facing a rise in expenses that represents a litigious trend facing the entire industry.  

“Like other financial services firms, we have seen an increase in litigation,” Jones spokesman John Boul wrote in an email. “Through a recurring and consistent process, we regularly adjust legal reserve expenses and potential contingency ranges as warranted.”

The disclosures in Edward Jones and Raymond James’ 10-Q filing offer a rare peek at the costs of litigation for retail firms, since most large retail brokerage firms are parts of larger bank companies that don’t break out such particular projections.

LPL Financial, the largest independent broker-dealer with 16,189 brokers, in its first-quarter earnings filing with the SEC earlier this month noted the inherent difficulty of estimating financial losses relating to fines, customer restitution and legal defeats and assessing probabilities and timing. However, it said that it is likely to reach settlements with 16 states this year that will entail fines of about $26.4 million relating to sales of unregistered securities. That will supplement 37 settlements made earlier with other states and jurisdictions.

Jones’ filing noted that a federal judge in Chicago in March dismissed the wage and training-cost clawback claims from former employees. On May 3, however, the former brokers through their law firm Stowell and Friedman filed an amended complaint that provide additional evidence of the brokers’ standing to bring the class-action lawsuit.

“We have seen the amended lawsuit filed by plaintiffs following the dismissal of their earlier amended complaint and have informed the court that we will file a renewed motion to dismiss,” Boul wrote.

For Jones, the maximum estimated legal expense of $32 million represents 13.3% of the $241 million that the company earned in the first quarter. It comes as the brokerage sales force has continued to climb, rising 9% in the past 12 months to 17,059 advisors as of March 29th. Those advisors managed $1.2 trillion in client assets, up 8% from the prior year’s quarter.Raymond James $110 million legal cost estimate represents 83% of its $132 million profit in its private client group in the first three months this year and 32.8% of its company-wide earnings of $335 million. The firm expanded its headcount 3.4% to 7,862 from 7,604, largely through recruiting of veteran advisors, and assets under management rose 9.3% to $760 million.