Brokerage firms agree to pay millions to overcharged clients

Several U.S. brokerage firms are paying more than US$12 million in restitution to investors who paid excess fees on education savings plans.

The Financial Industry Regulatory Authority (FINRA) announced that three firms — Merrill Lynch, Pierce, Fenner & Smith Inc. (Merrill Lynch); Raymond James & Associates, Inc. (RJA); and Raymond James Financial Services, Inc. (RJFS) — have agreed to pay restitution to investors who were charged excess fees in their savings vehicles known as 529 plans.

The regulator found that the firms’ clients were overcharged because the firms failed to ensure that their reps considered the plans’ fee structures when making recommendations to clients.

Typically, these plans are sold in different classes — class A shares that carry a front-end sales charge, but lower annual fees; and class C shares, with no front-end sales charge but higher annual fees.

“The firms’ supervisory systems did not require registered representatives or supervisors to evaluate beneficiary age and the number of years until expected withdrawals, combined with the different fees and expenses of the share classes, when making share-class recommendations,” FINRA stated in a release.

The firms settled the cases without admitting or denying FINRA’s findings.

FINRA said that the settlements — which will see Merrill Lynch pay US$4 million, RJA pay US$3.8 million and RJFS pay US$4.2 million — reflects the firms’ “extraordinary” cooperation with its investigations.

“FINRA member firms must be cognizant of all costs to their customers when recommending a product. This is particularly important where an unsuitable recommendation may cause customers to incur higher fees year-after-year, especially in the case of young beneficiaries,” said Jessica Hopper, senior vice president and acting head of FINRA’s enforcement division.

“Returning money to harmed investors as quickly and efficiently as possible remains a priority,” she added.

These violations occurred before FINRA launched an initiative in January that calls on brokerage firms to self-report potential violations involving 529 plans.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.