In the first settlement of its kind, the NASD hit Raymond James with a $750,000 fine Wednesday for improperly putting certain clients in fee-based brokerage accounts. The NASD said Raymond James Financial will terminate its fee-based brokerage business, which currently represents $5.5 billion in assets, by July 1, 2005.
In a statement, Raymond James emphasized that it is not ditching fee-based business all together. “To the contrary, we expect to maintain a leadership position in innovativealternatives,” the company said. The firm plans to recommend to clients in fee-based brokerage accounts that they convert them to fee-based advisory accounts or to commission brokerage accounts “as appropriate.”
In its investigation of the firm, the NASD found that Raymond James recommended and opened thousands of fee-based brokerage accounts for investors who trade infrequently, and that the firm failed to supervise its fee-based brokerage business. Raymond James neither admitted nor denied the charges.
In a notice to members in the fall of 2003, the NASD warned broker/dealers to determine whether fee-based brokerage accounts are appropriate before recommending them to clients. While fee-based brokerage accounts often make the most sense for investors who trade frequently, commission accounts tend to be more appropriate for buy-and-hold investors.
According to the NASD, between early 2001 and Dec. 31, 2003, Raymond James recommended and opened fee-based accounts for approximately 2,913 existing customers who had commission-based accounts for more than one year without executing a trade in the account. In addition, more than 13 percent of the customers in Raymond James’ Passport Brokerage accounts—the firm’s primary fee-based brokerage account—made no trades in their accounts in 2001. The percentage of Passport Brokerage accounts that made no trades increased to 14.2 percent in 2002 and 16.6 percent in 2003.
Raymond James also used advertising and sales literature that emphasized the benefits of fee-based accounts without adequately discussing the fees and restrictions associated with those accounts, the NASD said.
As part of the sanctions imposed by the NASD, if Raymond James doesn’t discontinue its fee-based brokerage business by July 1, 2005, the firm will have to retain an independent consultant to oversee the creation of a supervisory system for the fee-based brokerage business.