RayJay Sued for Reverse Churning in Fee-Based Accounts
(Story updated in seventh paragraph to say that a refiled reverse churning case against Edward Jones has been dismissed.)
An investor has filed a putative class-action lawsuit against Raymond James Financial, accusing it of “reverse-churning” by encouraging buy-and-hold customers to move from commission trading accounts to fee-based advisory accounts without considering the suitability of the recommendations.
It accuses Florida-based Raymond James of negligence in failing to assess suitability of the transfer recommendations, and of breach of its fiduciary once the trading accounts were moved into advisory accounts.
Raymond James reported last week that 52% of client assets, or $444.2 billion, were in fee-based advisory accounts, up from about 40% three years earlier.
Spokespeople at the Florida-based company did not respond to a request for comment on the suit.
It was filed on behalf of named plaintiff Kimberly Nguyen, a Texas resident who allegedly paid $7,432 in fees from 2016 to 2018, by lawyers that included representatives of Franklin D. Azar & Associates, a plaintiff’s firm that two years ago filed a similar reverse churning class-action suit against Edward D. Jones.
A California court last July dismissed the Jones suit, and in November dismissed with prejudice a refiled breach-of-fiduciary-duty claim made by the plaintiffs. Lawyers at Azar who worked on the Jones and Raymond James filings did not return calls for comment.
Large broker-dealers in general prefer fee-based to commission accounts, the new lawsuit asserts, and Raymond James took advantage of the Department of Labor fiduciary rule that was announced in 2015 to prod brokers to encourage transfers.
The fiduciary rule was vacated in June 2018 by the Fifth Circuit Court of Appeals, but “Raymond James did not then undertake a review of its fee-based accounts to determine whether—in light of the changed regulatory environment—any clients should properly be placed back in commission-based accounts,” according to the lawsuit.
Raymond James last year agreed to a $15 million settlement of class-action litigation alleging unauthorized charges in a fee-based managed account program, but executives last week said they expect litigation costs to fall during the rest of this fiscal year.
The lawsuit filed on Friday did not estimate the number of potential plaintiffs expected to qualify as members of the class. Raymond James has disclosed in filings that a “significant portion” of its rapidly growing asset-based fees in the past few years came from existing clients, the lawsuit says.
It seeks compensatory, statutory, double, treble and punitive damages through a jury trial.