Edward Jones will pay $17 million to settle an investigation by state securities regulators into how the firm supervised the transfer of brokerage account assets into advisory accounts.
According to the North American Securities Administrators Association, the investigation spanned four years and included 14 state securities regulators. The investigators looked into how Edward Jones supervised moving customers’ assets from brokerage to advisory accounts following the U.S. Department of Labor’s 2016 fiduciary rule under the Obama Administration.
The 2016 rule mandated that investment advice for retirement accounts was subject to fiduciary standards. (The Fifth Circuit Court of Appeals later struck down the rule several years ago, and the then-Trump presidential administration opted not to appeal.)
In a statement, Alabama Securities Commission Director Amanda Senn (also the NASAA Enforcement Section Committee co-chair) said the settlement reflected state securities regulators’ “collaborative approach” to resolving a nationwide issue while thanking Edward Jones for cooperating during the investigation.
“Firms that offer both brokerage and investment advisory services should be mindful that customers are receiving the services the customer wants at an appropriate price,” Senn said.
According to a consent order filed by Arkansas state regulators against Edward Jones, some of the firm’s brokerage account assets were used to purchase Class A mutual fund class shares. These products often include a single “front-end load” charge and are suitable for longer-term holds, with advisors guiding clients assuming they would hold those shares for at least several years.
According to Arkansas regulators, Edward Jones launched investment advisory accounts called “Guided Solutions,” in which the firm charged fees based on a percentage of the value of a client’s assets (as opposed to the commissions on brokerage-only accounts).
When the DOL issued its 2016 fiduciary rule, Edward Jones urged its advisors to speak with clients about how its mandates would impact different retirement accounts, with more stringent regulations on brokerage retirement accounts. Some customers opted to move their money to advisory accounts, which by law had a fiduciary standard of care. However, this meant that some clients who had recently purchased Class A shares would be hit twice with fees, both by the front-end load of the mutual fund purchase and the fee-based setup for advisory accounts.
According to the Arkansas document, Edward Jones urged advisors to communicate and disclose issues with clients and, in some cases, offered a prorated offset of investment advisory fees for clients who’d paid sales loads for Class A shares in the prior two years. But this offset didn’t fully close the gap of the front-end load those customers allegedly paid. State regulators believed that between 2016 and 2018, certain advisors serviced brokerage customers who became advisory clients and paid more than $10 million in front-end loads on Class A shares retained by Edward Jones “and not applied as an offset” to advisory fees.
A spokesperson for Edward Jones said the firm’s advisors “take a personalized approach to understanding” its clients’ needs.
“We are aligned with regulators that protecting investors is a top priority committed to maintaining robust supervisory and compliance systems and continually improving them,” the spokesperson said.
In deciding the settlement amounts, NASAA considered whether the investment advisory accounts’ performance was positive compared to brokerage accounts, the low per-customer restitution amount and the time since the issues. Edward Jones agreed to pay administrative fines totaling $320,000 to all 50 states (as well as Washington, D.C., the U.S. Virgin Islands, and Puerto Rico).
