Edward Jones Being Sued for Breach of Fiduciary Duties… A Second Time

scalesEdward Jones Being Sued for Breach of Fiduciary Duties… A Second Time

I wrote a few months back that 401 K lawsuits were going to get out of hand. Well you would think that a brokerage firm in the 401 K plan business wouldn’t be in a situation where they could get sued but it is happening to Edward Jones now for the second time in a year.

According to www.investmentnews.com, Edward Jones has been sued for “excessive fees and self-dealing in its 401(k) plan.”  The lawsuit, Schultz et al v. Edward D. Jones & Co., L.P. et al, “alleges the broker-dealer and several employees overseeing the retirement plan breached their fiduciary duties by selecting high-cost mutual funds when identical, lower-cost ones were available, choosing “an unreasonable number” of high-risk investment options, and including a “poorly performing” money market fund in place of a stable value fund.”

Let’s make a distinction when it comes to mutual fund fees.  First, if you have a more expensive actively managed fund versus a low cost passive fund and that actively managed fund is designed no different than the passive fund, then that complaint is valid. Investors who want stock market like returns are better off in a passive fund than a higher cost actively managed funds. This is because those types of funds rarely out-perform passive index funds.

Second, they could be an actively managed fund that provides a low risk investment strategy. I think that you can justify those higher fees all day long because you are paying for risk management.

Being a Fiduciary means you have to put the client’s interests above your own. If Edward Jones thought that the management strategy provided some value for the higher fees and they, Edward Jones, was not benefiting from it, then I think that they are acting within their fiduciary rights.

Unless if this is true……

Plaintiffs also claim Edward Jones “engaged in self-dealing through a distribution relationship with several fund companies such as American Funds, Franklin Templeton Investments, Goldman Sachs and BlackRock.

They allege Edward Jones entered into arrangements with such fund companies to where Edward Jones split revenues with them in order to be included in the 401 K plan.

If it is proven that Edward Jones offered higher expense alternatives and that they were being compensated for having those higher expense alternatives in their 401 k plan, then Edward Jones has a problem.

If any of this is true, you would think a brokerage company like Edward Jones would have a better idea of what it means to be a fiduciary. It begs the question, what else is going on with that company that we don’t know about?

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