Edward Jones secures a significant victory in its ongoing legal battle with former clients who accused the firm of overcharging by placing them in fee-based advisory accounts, where a commission-based model would have been more appropriate.
A federal judge in California dismissed the latest complaint challenging the firm’s approach to determining the proper fee structure for client accounts.
This marks the third amended version of the complaint, originally filed in 2018, with the previous two versions also being dismissed. The plaintiffs alleged that Edward Jones improperly placed clients into advisory accounts where fees were charged regardless of trading activity. They argued that a commission-based model would have been more cost-effective for buy-and-hold investors.
This practice, often referred to as "reverse churning," occurs when clients are placed in fee-based accounts despite low trading activity, resulting in higher costs compared to a commission-based account. Reverse churning contrasts with the more familiar churning practice, where excessive trades are made to generate commissions.
The plaintiffs claimed Edward Jones breached its fiduciary duty by failing to supervise its advisors and ensure they conducted proper suitability analyses when recommending fee structures.
According to the court's summary, "Plaintiffs incurred higher fees in advisory accounts than they would have paid with commission fees on a per-trade basis. They argue that the accounts were inherently unsuitable, and the increased fees reflect a failure to perform an adequate assessment." The plaintiffs contended that by recommending these unsuitable accounts, Edward Jones violated its fiduciary duty.
However, the judge disagreed, noting that the fiduciary and suitability standards were not applicable in this case. The court found that Edward Jones was not acting as either a broker-dealer or investment advisor when making account recommendations, but rather as a prospective investment advisor.
The judge explained that even though the plaintiffs were already brokerage clients when the recommendations were made, the advice to move to advisory accounts fell outside the scope of a fiduciary responsibility because no formal advisor relationship existed at that time.
On the suitability claim, U.S. Judge Daniel Calabretta of the Eastern District of California ruled that higher fees alone do not prove Edward Jones acted improperly. "The fact that Edward Jones recommended advisory accounts and increased revenue from these services does not, by itself, indicate that the recommendations were made without a reasonable belief they were in the clients' best interests," he wrote.
Plaintiffs' attorneys did not immediately respond to requests for comment on the dismissal or any potential appeal.
Edward Jones celebrated the ruling, emphasizing that it validates the firm's dual approach to wealth management.
“This decision confirms that our financial advisors' personalized approach to understanding clients' needs and objectives meets all applicable regulatory standards," a company spokeswoman said. "Our top priority remains helping our clients achieve what matters most to them and their families.”
