Edward Jones Sued for Shuttling Customers to Fee Accounts
Four Edward D. Jones & Co. customers have filed a class-action lawsuit against the company and its executives, asserting that its aggressive promotion of fee-based advisory accounts is an illegal “reverse churning scheme” benefiting the firm at the expense of investors.
The complaint, filed in federal court in the Eastern District of California on March 30, said the firm has pressured its more than 16,000 brokers to switch their largely middle-income brokerage customers from commission accounts into advisory accounts that charge as much as 2% of assets annually, even though the clients “generally engaged in very little trading.”
Jones, which booked more than 75% of its revenue in 2017 from mutual fund sales to mom-and-pop customers, began marketing fee-based accounts in 2008 but accelerated its push “aggressively” in 2016, according to the complaint.
The St. Louis-based firm orchestrated the strategy “under the guise” of complying with the Department of Labor’s fiduciary rule governing retirement accounts that became partially effective last year, and much of the money was channeled to proprietary mutual funds that Jones introduced in 2013, it said.
“In orchestrating this scheme to churn revenue from essentially dead assets, Edward Jones made misleading statements and material omissions to their clients, including Plaintiffs, about the amount of fees they would pay,” the filing said.
The lawsuit, which also names Jones managing partner James D. Weddle, nine other senior executives and two proprietary asset management units as defendants, does not estimate the number of potential customers who could be represented in the class. The purported class covers people whose accounts switched from transactional brokerage to fee-based advisory accounts between March 30, 2013, and March 30, 2018.
“Edward Jones has consistently offered both fee-based and commission-based client accounts that adhere to all regulatory requirements,” spokesman John Boul wrote in an emailed statement. “We believe Edward Jones client accounts are among the best options in the industry, and we intend to vigorously defend this action.”
Average annual balances in Jones’ advisory programs, Advisory Solutions and Guided Solutions, more than doubled to $265 billion in 2017 from $101 billion in 2013, according to the complaint. Fees generally range between 1.35% and 1.50% of assets annually, and can reach 2% when administrative fees and underlying fund expenses are included, it said.
A wide range of firms, from Jones to Ameriprise Financial to wirehouses such as Merrill Lynch, Morgan Stanley and UBS, have been promoting advisory accounts in recent years because they generate stable fees regardless of retail customers’ trading activities. Fee accounts also protect firms and brokers from allegations of churning, or trading merely to generate commissions.
The rapid growth of the advisory accounts, however, has raised regulatory concerns about firms’ diligence in determining the most appropriate account for particular customers. Those who do little trading, for example, might pay less in a commission account than they would in an advisory account with an asset-based fee.
The Financial Industry Regulatory Authority highlighted that issue, known as “reverse churning,” as an examination priority this year.
The lawsuit asserts that Jones’ marketing materials imply that advisory and commission accounts are comparable and do not fully disclose the conflict of interest inherent in Jones’ liberal use of its in-house “Bridge Builder” funds in advisory accounts. The fund family is managed by Olive Street Investment Advisors, a unit of parent company Jones Financial.
Jones generated nearly $17.2 billion in fees from advisory accounts between 2013 and 2017, according to the lawsuit.
“In order to continue to grow its bottom line, which had flattened before it had begun moving to a fee-based model, Edward Jones clearly intended to – and did – compel clients into a fee-based advisory program, regardless of whether such a move was suitable,” it said.
John Garner of the Garner Law Office in Willows Calif., a co-counsel in the class-action along with Ivy Ngo of Franklin D. Azar & Associates in Aurora, Col., said the plaintiffs who reached out to his office are high-profile leaders in their communities, and include a county supervisor, a retired law enforcement official and a community organizer.