Raymond James changed policy and told its advisors Monday that the firm, not the advisor, would pay all of the rebates due to clients who were wrongly sold more expensive classes of mutual funds over the past five years.
The change comes just a week after the firm sent advisors a notice requiring them to pay the clawbacks.
“After continued dialogue with advisors, Raymond James will absorb the cost of mutual fund sales charges and fee rebates to clients with eligible retirement plan and charitable trust accounts, and not require advisors to return commissions received on the mutual fund purchase transactions,” a spokesperson for the firm said Monday.
The rebates are due on some mutual funds that waive their upfront sales charges for Class A shares sold to charities or within retirement accounts. Class A shares generally have lower management fees than Class B or C shares, but charge a front-end sales load. The mutual funds offered on the Raymond James' platform disclosed these waivers on their prospectuses. But according to the firm’s initial notice, many advisors failed to waive the fee, or they purchased Class C shares within these client accounts.
"Given the complexities of the subject – including policy variations among fund companies, lack of clarity in prospectuses, and a gap in the industry’s and Raymond James’ abilities to systematically identify waiver availability, we felt this would be the best way to limit distraction for advisors and minimize confusion for clients," the spokesperson said. "In addition, our decision should serve to eliminate any concerns that the chargebacks may have implied negligent or deliberate actions by advisors. As always, we are confident our advisors are working in the best interests of their clients."
Advisors welcomed the news. “The company made a mistake and got caught between a rock and a hard place,” one advisor said, adding that he was impressed Raymond James chose to drop the clawback plans.
Advisors on a call Thursday with the firm's leaders said they had been given until the end of the month to identify which clients should receive rebates. As of Thursday, the firm was planning to send letters to clients on March 23 explaining the situation and mail rebate checks by April 13, according to advisors familiar with the matter. "It needs to come off as an appropriate gesture, without making it look like the advisor screwed up," the advisor said of the upcoming communications with clients.
"This is a unique situation for the industry and for Raymond James, so we are expediting the reimbursement process and supporting our advisors while doing the right thing for their clients," the spokesperson said Monday.
Additionally, the firm is planning to update its mutual fund order system later this spring to address the waiver issues. Until the system is fixed, advisors will have to phone in mutual fund orders when questions around this issue occur.
But the latest decision by the firm to reimburse clients may affect Raymond James’ earnings. The firm announced an unexpected $10.5 million adjustment related to mutual fund commissions during its first quarter, fiscal 2015 earnings release and the subsequent earnings call last month. A spokesperson for the firm confirmed last week that these actions were related to the adjustment referenced in the release and call.
Raymond James CFO Jeff Julien said at the time that the $10.5 million adjustment was a “worst case type number,” and the firm may adjust it downward at some point in the future. But with Monday's news, it's possible the firm may have to take further adjustments.
Raymond James raised the issue of the fees after FINRA brought an enforcement action against Merrill Lynch. In June, FINRA fined Merrill Lynch $8 million and required the firm to repay $89 million to investors for failing to waive mutual fund sales charges on Class A shares for charities and retirement accounts.
Raymond James notes that the firm has not been cited or fined. Representatives for the regulator still have not responded to requests for comment on the matter.
