A chill is running down the spine of the brokerage industry. The threat? A possible onslaught of class-action lawsuits citing fiduciary duty violations in response to firms’ migrating commission-based customers to allegedly more expensive asset-based accounts.

One of the first of such lawsuits has been filed by a group of investors against Edward Jones, two of its subsidiaries and several senior executives. The plaintiffs allege they were charged unnecessary fees that amounted to a violation of the firm's fiduciary duty.

The investors are alleging some 16,000 Edward Jones’ brokers were pressured to reverse-churn their assets—a practice whereby advisors moved largely dormant customers into fee-based accounts when the commission model would have been less expensive for the clients.

Describing themselves as "unsophisticated investors," the plaintiffs said they are suing on behalf of Edward Jones investors who saw their commission-based accounts moved to a fee-based model between March 2013 and March 2018.

"In orchestrating this scheme to churn revenue from essentially dead assets, Edward Jones made misleading statements and material omissions to their clients, including plaintiffs, about the amount of fees they would pay," the complaint alleged.

Average annual balances in Jones’ advisory programs, Advisory Solutions and Guided Solutions, more than doubled to $265 billion in 2017 from $101 billion in 2013, according to the complaint. Fees generally range between 1.35 percent and 1.50 percent of assets annually and can reach 2 percent when administrative fees and underlying fund expenses are included, the complaint said.

Edward Jones said in a statement that the firm is reviewing the complaint. "Edward Jones has consistently offered both fee-based and commission-based client accounts that adhere to all regulatory requirements. We believe Edward Jones client accounts are among the best options in the industry, and we intend to vigorously defend this action,” the brokerage said.

The St. Louis-based firm carried out the strategy “under the guise” of complying with the Department of Labor’s fiduciary rule governing retirement accounts that became partially effective last year, and much of the money was channeled to proprietary mutual funds that Jones introduced in 2013, the lawsuit said.

The rapid growth of advisory accounts has raised regulatory red flags about whether they are the most appropriate account for customers who do little trading and would pay less in a commission account. The lawsuit asserts that Jones’ marketing materials imply that advisory and commission accounts are comparable and fail to disclose the conflict of interest inherent in Jones’ liberal use of its in-house “Bridge Builder” funds in advisory accounts. The funds are managed by Olive Street Investment Advisors, a subsidiary of Jones Financial.

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