A group of investors has filed a class-action lawsuit against Edward Jones, two of its subsidiaries and several senior executives, alleging that they were charged unnecessary fees that amounted to a violation of the firm's fiduciary duty.
The case turns on allegations of a reverse churning operation in which advisors moved largely dormant accounts into the fee-based side of the practice, when the commission model would have better served the clients.
"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 complaint alleges.
Edward Jones responded with a statement acknowledging the lawsuit and saying that it is reviewing the complaint.
"Edward Jones has consistently offered both fee-based and commission-based client accounts that adhere to all regulatory requirements," the brokerage says.
"We believe Edward Jones client accounts are among the best options in the industry, and we intend to vigorously defend this action," it adds.
The complaint alleges that Edward Jones moved clients' commission-based accounts with little to no trading activity to the fee-based Edward Jones Advisory Solutions or Guided Solutions programs.
The advisors also concealed their preference for Edward Jones' proprietary products that were only available through the Advisory Solutions program, according to the complaint.
"Clients who were invested in a proprietary fund were entitled to know about defendants' competing interests that caused them to make self-interested investments on their clients' behalf," the complaint alleges.
In highlighting reverse churning and the promotion of proprietary products, the plaintiffs have pinpointed two issues that have been attracting mounting attention from regulators. In a letter outlining the SEC's examination priorities for 2018, the commission warned that it will closely scrutinize how firms are assessing and disclosing the fees they charge, and said that it expects firms to be able to justify why they opted to steer clients toward high-cost or risky products.
The plaintiffs, who describe themselves as "unsophisticated investors," are bringing the case on behalf of a class of Edward Jones clients who saw their commission-based accounts migrate to a fee-based model from March 2013 through March 2018.
The reverse churning that the complaint alleges was a core element of Edward Jones' business model, the plaintiffs argue. In the complaint, they note the firm's record earnings over the five years of the class period, propelled by $17.2 billion in asset-based advisory fees.
They cite a 2017 SEC filing, in which Edward Jones boasted of "a 36% increase in asset-based fee revenue due to the increased investment of client assets into advisory programs."
In that filing, Edward Jones explained that the migration of clients' assets into fee-based programs was due to the expanded menu of investment products available only through the advisory channel, as well as the move away from commission-based retirement investments following the Department of Labor's fiduciary rule.
The case is pending before the U.S. District Court in the Eastern District of California, where the named plaintiffs reside.
The named plaintiffs are: Edward Anderson, Raymond Keith Corum, Jesse Worthington and Colleen Worthington.
The Edward Jones executives named as defendants in the lawsuit are: James D. Weddle, Penelope Pennington, Daniel J. Timm, Kenneth R. Cella Jr., Brett A. Campbell, Kevin D. Bastien, Norman L. Eaker, Vincent J. Ferrari, Timothy J. Kirley, and James A. Tricarico Jr.