The entire concept of reverse churning continues to be a head scratcher for us. To quickly recap, first commission based accounts were bad (just ask Tom Buck) but now fee-based accounts are also considered bad and are being taken to the legal woodshed. Give us a second so that are heads can stop spinning.
A well-known ‘reverse churning’ lawsuit was dismissed last month on behalf of plaintiff lawyers claiming that customers at Edward Jones were forced into fee-based accounts when they were perfectly happy in their commission based ones. Thus the term ‘reverse churning’; as the fees associated with the new wrap accounts outpaced the commissions generated on the same accounts on an annual basis.
“Customers accusing Edward D. Jones & Co. of generating hundreds of millions of dollars in a “reverse churning” scheme have refiled their complaint, following dismissal of their putative class-action lawsuit by a federal judge last month.”
“The core argument that Jones shifted clients to fee-based accounts that are more costly than traditional brokerage accounts remains, but the refiled complaint has been modified to overcome Eastern District of California federal judge John Mendez’ objections on the law, said Ivy T. Ngo, one of the lead counsels for the plaintiffs.”
“Lawyers eliminated several Jones executives and asset management units as defendants, added allegations from former advisors about inadequate suitability assessments and changed the focus of the charges to the firm’s breach of fiduciary duty, she said.”
One Morgan Stanley advisor said it best: “Get the fuck outta here with reverse churning. These compliance and regulatory fucks are doing whatever they can to justify their existence. Pure comedy.”
So the lawsuit lives and plaintiff attorneys are going to give it a second go. The nonsense of reverse churning lives and breathes and we will continue to talk about it for months to come. Strange happenings in the delta that brings together wealth management and the legal field. Strange indeed.