In Focus
January 9, 2004
dward D. Jones & Co. is in the news, and not for its purported Main Street values or its purported focus on buy and hold investing. Instead, front page Wall Street Journal news on January 9, 2004 tees up the Edward Jones firm right alongside Morgan Stanley (with Morgan Stanley recently having paid $50 million to settle with regulators). Both firms failed to disclose conflicts of interest to their customers in the sale of mutual funds. One Edward Jones customer is quoted as saying that he feels "violated".
Turns out, Edward Jones and its brokers did not disclose that when they sold mutual funds from mutual fund families American Funds, Hartford, Lord Abbett, Van Kempen, Putnam, Goldman Sachs and Federated Investors, these "preferred" fund families had paid the Edward Jones firm itself about $100 million per year just to be on the preferred list. The fund companies also paid for Caribbean cruises and African-wildlife tours for the brokers. And Edward Jones ensured that the brokers would have plenty of spending money for their African and Caribbean trips, as the firm shared its take with the brokers.
Indeed, the take was so good for the Edward Jones firm that former brokers admitted to the Wall Street Journal that they heavily were pressured to sell those funds and only those funds. One former broker sold these fund families almost exclusively because he feared not doing so. Another admitted that brokers had no choice but to drink what brokers there referred to as the "corporate Kool Aid".
The SEC has recognized that this "revenue sharing" between fund families and brokerage firms creates a conflict of interest. Even former SEC Commissioner Arthur Levitt, who had praised the firm for marketing a buy and hold investment strategy, believes that the practice is "bad", and that it should be abandoned or at least disclosed.
Meanwhile, Edward Jones customers need to do more than simply await corporate apologies and partial reforms. State securities laws may provide customers with the right to rescind their mutual fund purchase, recovering their investment, plus interest and attorneys' fees. Those actions will send a message to Edward Jones as to what Main Street values really mean!
— James J. Eccleston
FinancialCounsel.com
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