Jones Pays
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The real crime here is not that Jones took quasi-legal kickbacks. The real crime is that they have not been punished heavily enough for their gross hypocrisy. I began my career in 1982 with Jones by handing out copies of a magazine article extoling the virtues of the “conservative” investment company. I personally witnessed brokers selling oil and gas limited partnerships as bond equivalents and I read Saturday morning wires offering a sleeve of golf balls if you sold an unrated bond. I left because of the hypocrisy. Frankly, there is an order to the world and when things get out of balance, they are brought back in line by a variety of means. I fervantly hope that the class action lawsuits and the suit filed by the California AG will bring some semblance of justice to a “whore” brokerage firm and its band of koolaide drinking pimps. By the way, Merry Christmas!
Dashampersand,
Perfectly written. I left because of the hypocrisy as well, and can't agree more with your reference to "order" and "balance". Jones HAD it, and blew it when they consciously decided to grow the firm, but not evolve the business model.
It's interesting to watch now. They can't evolve because of their structure, and the world is not going to let them stay the way they are. To invoke a little Darwin, they are at an evolutionary DEAD END.
Just saw this article showing that they have emails from Brokers to substantiate their claims.
Edward Jones Brokers Concerned Yrs Ago About Rev Sharing
By ARDEN DALE and KATHY CHU
December 21, 2004 4:40 p.m.
Of DOW JONES NEWSWIRES
NEW YORK -- Long before regulators got involved, Edward D. Jones brokers had expressed concerns about financial incentives they had to sell certain mutual funds.
In more than a dozen internal e-mail messages between Edward Jones employees - and released by California Attorney General Bill Lockyer this week as part of a civil lawsuit brought against the brokerage house - brokers questioned whether they were serving their clients' best interest if they were pitching mutual funds partly because they brought in higher revenue to the firm. The e-mails date as far back as 2001.
What concerned the employees who sent the e-mails were incentives that brokers got for steering investors to a small group of funds, some of which didn't have particularly good performance records.
"There is something dirty about the mutual fund business that has been developing over the last 5 years," one Edward Jones employee wrote in an e-mail dated May 17, 2001, going on to criticize the company's own policies. Another message, dated Dec. 8, 2003, expressed concern that "we could have a can of worms opened" if the firm's practices were looked at closely.
The e-mails, released Monday by Lockyer, provide a telling glimpse into how and why brokers push certain investments. Lockyer alleges that Edward D. Jones failed to tell investors about payments it got from seven mutual-fund companies: American Funds, Federated Investors Inc. (FII), Goldman Sachs Group Inc. (GS), Hartford Mutual Funds Inc., Lord Abbett & Co., Marsh & McLennan Co.'s (MMC) Putnam Investments and Van Kampen Investments.
Also this week, the company agreed to pay $75 million to settle similar charges by the Securities and Exchange Commission, the National Association of Securities Dealers and the New York Stock Exchange.
At issue is the practice of revenue-sharing, called "pay to play" by critics, in which financial relationships exist between brokers and the mutual funds they sell. Although not illegal, regulators who have looked at the practice say that failing to disclose these arrangements may be against the law.
Revenue sharing troubled people inside of Edward Jones partly because of how this apparent conflict-of-interest contrasted with the firm's image. One writer, in January 2004, said he was feeling "a bit disgusted now to work for a firm who portrays the image of being proper & moral in its practices" but that will "play a little dirty to get more revenue."
Another employee said some of the favored funds tried to sway brokers with spreadsheets showing how much bigger bonus checks would be if they pushed their funds over others. "Without question, this information has tainted my objectivity and has the potential to change the pattern of my investment recommendations," said the person in an e-mail dated Dec. 17, 2003.
The e-mails - many of which were addressed to a suggestion box at Edward Jones - bring into living color an issue that can seem dry as dust. Lockyer spokesman Tom Dresslar said the California attorney general gathered the documents as part of an investigation he has been conducting since earlier this year of mutual-fund practices.
"Whenever there's an investigation, typically there's an information request that includes e-mails," said Stan Keller, a securities lawyer at Palmer & Dodge in Boston. "As we've seen in a number of prominent situations, there could be a treasure trove found in the e-mails ... because of the candid nature of e-mails."
Edward Jones declined to comment on the e-mails.
The company is not the only one with an incentive to sell certain funds. Other brokerage firms that get paid for pitching a preferred list include Citigroup Inc.'s (C) Smith Barney unit, UBS AG (UBS), Wells Fargo & Co. (WFC), American Express Co. (AXP), Linsco/Private Ledger Corp. and Morgan Stanley (MWD), according to Cerulli Associates, a research and consulting firm in Boston.
Mutual-fund firms may pay up to 50 basis points in revenue-sharing and 12b-1 marketing fees to brokerage houses to be on their preferred lists, estimates Benjamin Poor, a senior analyst at Cerulli.
These revenue-sharing arrangements may cast a shadow over financial advisers' obligations to keep their clients' best interests in mind.
"Who pays us the most - who calls on (SIC) the most -who helps us the most seems to be all I ever hear about funds and their wholesalers," wrote a broker in a May 17, 2001 e-mail. "What about who makes our clients the best returns with the least risk?"
-By Arden Dale; Dow Jones Newswires; 201-938-2052; [email protected]
-By Kathy Chu; Dow Jones Newswires; 201-938-5392;
That can't be good.
NASD said it found that Jones held unlawful sales contests every six months. Winning brokers could choose from a list of 35 so-called "world class" vacations in locations such as Singapore, the Caribbean islands of St. Martin and Tortola, and the southwest France resort of Biarritz, with airfare and five-star accommodations.
After the firm changed the rules favoring sales of funds on the Preferred Funds list, some brokers complained that recommending non-preferred funds and variable annuities hurt their chances of winning a trip, NASD said.
I remember these nickel ass vacations....you would "win" a free trip, receive a 1099 for $5000, and pay taxes of close to $2000 for this brainwash junket. Then, of course, you would listen to Putnam, American, and Van Krampen Ho' salers review variations of the ICA chart......sorry, didn't mean to ruin it for you new hires! It really is still a good place to learn to sell shxt.
Hey if anyone has anything they think may be legitimate and appropriate for the California State Attorney General to know, here's the address.
http://caag.state.ca.us/
One of the many reasons I left was because of the way the whole Putnam situation was handled. That was the first time I realized that, "you know what, this company I work for is not as ethical as they want you to believe."
What a shame.
Hey Ex: When did you leave?
Congrats on making the leap and leaving the dark side.
I left last May. Went to RJA. Never been happier. Will be even happier when I transition to indy in a few years. It is unbelievable that what you say in your tagline is so true. The grass was so much greener on the other side of the fence. I’m just glad I figured that out before all this s$%t hit the fan. I feel real bad for my friends still at Jones. They try to put on that optimistic face, but you know it has to be tough.
Clients of brokerage are looking for answers
By Peter Shinkle
Of the Post-Dispatch
Tuesday, Dec. 21 2004
Betty Risley, 70, a retiree who lives in Arnold, is hopping mad about the
investments she made five years ago with Edward D. Jones & Co.
Risley said she invested $155,000 of her retirement money into mutual funds
recommended by her Edward Jones broker. Assured by the broker that she could
withdraw money each month without eroding her principal, Risley was dismayed as
she saw her investment dwindle to about $90,000.
Then, earlier this year, she learned that Des Peres-based Edward Jones was
accepting payments from mutual fund companies for placing their names on its
list of "preferred fund families" - and those were the companies recommended to
her.
"As far as I was concerned, that was unethical and that was a kickback," she
said Tuesday.
Edward Jones agreed Monday to pay $75 million to avoid criminal charges for
accepting the payments from the mutual fund companies and not disclosing them
to investors like Risley.
An Edward Jones spokesman said Tuesday that he could not comment on the dispute
over revenue sharing, citing pending litigation.
The agreement, announced by U.S. Attorney Jim Martin in St. Louis, also
requires Edward Jones to inform clients about all such payments from fund
companies and to permit clients to move money out of the preferred fund
families at no cost.
In addition, Edward Jones must launch a hot line to allow employees to report
potentially illegal conduct, and it must fully cooperate with federal
investigators. If Edward Jones completes its obligations under the agreement,
no criminal charges will be filed, Martin said.
Risley and other investors contacted the Post-Dispatch on Tuesday seeking
information about the settlement and the $75 million, which is to be used to
pay restitution to people harmed by the brokerage firm's conduct.
Martin said information about how the $75 million is to be distributed will
become available only when the Securities and Exchange Commission approves the
settlement.
Once the settlement becomes final, the SEC is expected to seek a court-approved
process to distribute the money.
Martin said there is nothing illegal in the payments themselves, but the
"problematic" conduct was the failure of Edward Jones to disclose the payments,
which Jones used to decide whether to admit or retain a company in its list of
preferred fund families.
Chuck Freadhoff, spokesman for American Funds, based in Los Angeles, said the
fund group has no plans to stop making the payments, known as "revenue
sharing," to Edward Jones and other companies. They are legal and appropriate,
he said.
Freadhoff said the affiliate that markets the funds, American Funds
Distributors Inc., makes the payments to Edward Jones and other brokers to
compensate them for the cost of meeting with American Funds marketers.
"When our wholesalers meet with the financial adviser of any company, there is
a cost for that to the company and the adviser," he said. "And so we make
payments to the companies, such as Edward Jones, to help defray that cost."
Risley, the retiree from Arnold, said Edward Jones never informed her of the
payments it was receiving from Federated or Hartford, the fund families she
invested in in 1999.
Risley said she worked for 35 years for Sunline Brands, buying materials used
in making the company's candy products. Five years after she retired, an Edward
Jones broker convinced her to transfer her retirement funds from a certificate
of deposit at a bank into mutual funds. She agreed, and placed $155,000 into
the funds recommended by the broker.
"Federated - I never, ever heard of them before," she said. "I just wanted
something that was safe and that I could have a monthly income from." She said
she withdrew a total of about $38,000, but stopped most withdrawals about two
years ago when she grew concerned that her retirement money would be used up.
Now, she said, "I feel like I was maybe taken advantage of."
Risley said the broker later left Edward Jones. Her current Edward Jones broker
is doing everything he can to help her, she said, but he still doesn't know
whether she can move the money out of the accounts without paying fees.
"My personal opinion is I should be able to get out of that completely without
any penalty, and not have to go to any other fund because - how do I know what
they will suggest next time?" she said.
Another upset investor is Carl Fox, 50, a mechanical draftsman who lives in
north St. Louis County. He said his Edward Jones broker recommended that he
place $10,000 in two Putnam funds in 1998. The investment is now worth less
than half that, he said.
"I thought the guy knew what he was doing," Fox said. "It dwindled real fast."
As for the payments to the brokerage, Fox said, "He never told me that."
Who made payments
The mutual fund groups that made the payments to Edward D. Jones & Co. that
weren't disclosed were:
American Funds
Putnam Funds
Van Kampen Funds
Lord Abbett Funds
Hartford Mutual Funds
Goldman Sachs Funds
Federated Mutual Funds
Reporter Peter Shinkle
E-mail: [email protected]
Phone: 314-621-5804
To spark a discussion ..here is a question that has been nagging at me....How do you teach a broker to sell a mutual fund without actually showing them a mutual fund? And if you show it to them in training, doesn't it by default, become 'favored' and/or 'preferred'? If the broker I train under sees primarily two wholesalers, am I not leaving myself open to being accused of having 'preferred' dealings with one or two companies because they were the only ones I really ever got to know? The problem with the Edward D. Jones settlement is that it leaves us all open to litigation about how we choose our mutual funds and let's face it, most of us don't go through an entire listing each day and get to know them all and base our decisions on that.
go_rascals, that is an interesting question. After I left Jones 20 years ago, it took quite awhile for me to break away from the Jone's preferreds (then only 4 families). The problem is that unless a wholesaler stumbles upon your office, he may not know you exist because the B/D controls the master list of brokers and their contact info. You would have to call the fund company or insurance company and request to be contacted by a wholesaler. I have done it but it is a pain.
More importantly, most of us know that the proper asset allocation and rebalancing is far more important than market timing or even actual security selection. The problem with Jones using Putnam Funds, for example, was that Putnam had so much overlap that you could not have done asset allocation if you would have wanted to. I specifically remember in 2000 that their largest growth fund and their largest value fund had overlaps in 40/50 of their top holdings.
I have learned some very difficult lessons in 23 years of this business. Some have hurt my business and some have hurt my clients. First, never rely on your B/D for the complete story. Second, never totally rely on your wholesaler. Trust but verify. Third, select fund companies that have been historically reliable to both clients and brokers. Fourth, use asset allocation strategies and rebalance. Fifth, you can never over-document your relationship with your client.
"If the broker I train under sees primarily two wholesalers, am I not leaving myself open to being accused of having 'preferred' dealings with one or two companies because they were the only ones I really ever got to know?"
No. There's nothing wrong with having favorites, so long as they're not your favorites because they pay you more or offer you some other special compensation.
" The problem with the Edward D. Jones settlement is that it leaves us all open to litigation about how we choose our mutual funds..."
Nah, the fine was about kickbacks, pure and simple. You have nothing to worry about unless you're getting something similar from the funds you work with. That's my impression, at least.
In the 12-page order, regulators also took Edward Jones to task for promoting college-savings plans offered only by the fund families that made the secret payments. These popular savings vehicles, known as 529 plans, let parents save money for college without paying taxes on investment income or withdrawals, as long as the money is used for college expenses. Investment firms manage the plans on behalf of state governments.
Edward D. Jones said it offered 14 different 529 plans, but, in fact, it sold only three, those from American Funds, Hartford Mutual Funds Inc. and Marsh & McLennan Cos.' Putnam Investments, according to people familiar with the matter. Two of those companies -- the managers of the American and Putnam funds -- made additional revenue-sharing payments so brokers would steer clients to the plans they manage, these people said.
The action against Jones represents the first on 529 plans as part of a NASD sweep of 20 brokerage firms that sell the college-saving accounts. Regulators are concerned that secret payments are leading parents into higher-cost or worse-performing options. And, in some cases, investors aren't being told that they could get state income-tax breaks in certain states, such as New York.
"Customers are entitled to have information about the best plans being offered," said Barry Goldsmith, the NASD's head of enforcement.
I like the word "secret".....the use of that word is, in the words of a drab GP, "intresting"...sell many of those Laner?
One fund family, which the SEC identified as Hartford, agreed to provide Edward Jones an equity interest of at least 5% in the distributor of its mutual funds if Jones met certain sales thresholds, the order said. That equity interest was later changed to profit participation, the order said. Hartford declined to comment on that matter.
The hefty payments represented a conflict of interest for Jones's general partners, who share in the net income of the firm, the order alleges. Some of those partners make decisions regarding which mutual-fund families get preferred status, and others recommend the preferred families to their customers, the order alleges.
Even sales representatives who haven't achieved partner status face conflicts, because their bonuses, awarded three times a year, depend in part on the "profit and loss" statements for their offices, which are increased by revenue sharing, the order said. In a January 2000 internal newsletter, a regional sales executive wrote that that selling funds that provide revenue sharing over those that don't could net a sales representative an additional $265,369 in profit, according to the order. The SEC declined to name the executive.
Prediction: If a client lost money in any of these funds in the last four years, and they want to be made whole.... all they gotta do is ask. Just like the email scandal at Merl Lynch....arbitration time...arbitration time.
I think you may be right Jonestown. The amazing thing is the Attorney General in California really has his act together. More and more whistleblowers are going to surface. There is more dirt out there and that has to be scary. We haven't even talked about variable annuities and Jones has 3 preferred vendors here. 529 plans will be after that.
The question is who will be the white knight?
Happy Holidays to you UWEC. You were obviously an important figure in making this a special holiday season.
The AG in California is getting ready to run for Governor. He is a worshiper of Elliot Spitzer and is grandstanding. The only act he has together is his political one. He’s getting ready to waste a whole bunch of taxpayer money. He won’t consider it a waste because to him it’s free publicity. It’s a great country we live in, eh? Jones did nothing wrong. They could have gotten much more from other fund companies if they put themselves out to the highest bidder. The only reason they got whacked is because they are the ONLY firm that lets revenue sharing be credited to the brokers. Every firm has revenue sharing arrangements but Jones is the only firm that shares it.
I disagree with you. GPs forced their will be pushing these funds, 5 of which were inferior and padded their pockets to the tune of 75% of the revenues and you call this fair? Was the clients interest at stake? Does it make sense now why Jones never considered managed accounts? It all points to one thing and one thing only and that is greed.
Your are looking in the rearview mirror. Tell me which fund families will be the top performers in the next 5 years so we can tell the GP’s to include them. Also, is a managed account the best thing for the client or the broker? Now, let’s talk about greed. If Jones went to fee based account the revenue would skyrocket.