Stifel to Pay Massachusetts for Broker’s Client-Sharing Scheme with RIA
(Updates story throughout with name of the Stifel broker and details of the consent order putting him on heightened supervision.)
Stifel Nicolaus & Co. has agreed to pay the state of Massachusetts $300,000 for letting a broker run a business-sharing arrangement with an independent registered investment adviser that led to significant client overcharges, Secretary of the Commonwealth William Galvin said on Wednesday.
Since 2009, Francis J. Weller, Jr. has required clients of Weller Asset Management in South Orleans, Mass., to use Stifel as custodian for their accounts and to execute full-service commission trades through Timothy A. Johnson, a broker in Stifel’s East Harwich branch, according to separate consent orders reached with the broker and the firm.
Johnson, who services about 750 customers, generated $1.07 million of commissions from Weller’s 27 customers since 2012 alone, representing a “significant source of revenue,” according to one of the orders.
Customers paid Stifel up to $100 for trades that Weller recommended based on the broker’s tips and research. That supplemented the 1%-of-assets-under-management fee they paid for the RIA’s advice, the regulator said in a separate administrative complaint seeking to revoke his license.
The broker sent Weller “multiple emails a day” with third-party research and stock tips, and provided conference rooms for client meetings and other Stifel services at no charge, the state said.
“Weller’s overhead costs are subsidized by the BD and not disclosed to clients,” according to the complaint against the RIA, which characterized the RIA’s service delivery method as “anything but traditional.”
Fee-based advisors typically recommend that clients use a “discount broker-dealer that offers research, online trading, commissions as low as $7.95 and electronic tools for portfolio management,” the complaint said.
Because Weller’s clients were also Stifel clients, making them subject to suitability standards and other requirements, the broker-dealer violated supervision and books-and-record rules as well as state law, the consent order said.
Stifel, a unit of St. Louis-based Stifel Financial, agreed to the fine and a censure and a cease-and-desist order, without admitting or denying the facts alleged by the Massachusetts regulator.
Johnson has been put on three years of heightened supervision and cannot exercise discretion over customer accounts in Massachusetts in that period, according to his consent order. Stifel agreed to review his new accounts and all of his solicited trades for Massachusetts clients through central supervision, rather than through his branch manager, and to review 10 of his in-state accounts or 10% of them—whichever is greater—during annual audits of his branch.
Stifel also agreed to hire a consultant to review more than 6,000 trades that the state considered to have been solicited by Johnson because they were based on research he sent to Weller. Stifel will remunerate clients for unsuitable trades that the consultant identifies, according to the firm’s consent agreement.
Johnson, who began his securities career in 1979 at Thomson McKinnon Securities and joined Stifel in 2009 from Wachovia Securities, did not respond to a request for comment. He has three customer complaints filed more than 15 years ago, one of which was closed with no action and two of which were settled, according to his BrokerCheck record.
A Stifel spokesman said the company has no comment on the consent orders or on the broker.
Weller, whose single-person RIA manages $12.9 million on a discretionary basis, according to a September regulatory filing, did not respond to a request for comment.
He is a graduate of Harvard College with a major in international law, according to a brochure filed with regulators in 2017, and served for three years in the U.S. Navy on active duty. He has corporate sales experience at Xerox, Dupont and as an account executive at Merrill Lynch, the brochure said.