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Raymond James fined over fee-based accounts

The settlement calls for a $750,000 fine and $138,000 in restitution for clients who paid for accounts they rarely used.

By HELEN HUNTLEY
Published April 28, 2005

Investors who rarely or never traded paid thousands of dollars in extra costs because Raymond James brokers put them in accounts that didn't match their needs, securities regulators said Wednesday.

The National Association of Securities Dealers censured and fined Raymond James' two brokerage subsidiaries $750,000 in what is the first case to come out of an industry-wide investigation of fee-based brokerage accounts. Other companies remain under investigation, the NASD said.

Raymond James settled the case, agreeing to pay the fine and $138,000 in restitution without admitting or denying the charges. It also will discontinue the accounts, affecting about 27,000 customers, or about 2 percent of the company's clients.

The company said customers who have "Passport" or "Ambassador" brokerage accounts will be encouraged to switch to regular brokerage accounts or to Passport investment accounts, which charge annual fees but include financial advisory services. About 32,000 customers have Passport investment accounts.

The primary benefit of fee-based brokerage accounts is the reduction or elimination of transaction charges - a bonus for frequent traders. The accounts have been touted as a way to align a broker's and a customer's interests since both benefit when the account increases in value and there is no incentive to trade frequently. Raymond James promoted the accounts, which held $5.5-billion in assets by August 2004. However, the NASD said Raymond James' marketing materials failed to adequately disclose the accounts' costs and limitations.

Each year customers paid a fee of up to 2.5 percent of the value of their accounts even though 2,913 of them were buy-and-hold investors, including 190 who never traded, the NASD said. The 190 will receive restitution payments.

In one case the NASD cited, a customer's $420,000 account was converted to a Passport brokerage account in 2001 even though the customer had not made a trade in the eight years the account had been open. Two years later, the customer still hadn't made a trade, but had paid $6,000 in fees.

"Fee-based accounts can be appropriate for many investors, but they are not automatically appropriate for everyone," NASD vice chairman Mary Schapiro said. She said companies need to be sure the accounts are suitable and to review that suitability periodically.

"Raymond James is satisfied to have resolved this matter with the NASD," said Tracey Bustamante, director of corporate communications. "We continue to believe that fee-based accounts represent a sound way of providing service to clients."

Wall Street reacted favorably to the settlement, sending Raymond James' stock price up 46 cents to close at $27.25.

"The fine is a one-time thing that's not going to have a major impact on the firm," said Matthew Fischer, an analyst with Independent Research Group in New York.

He said the negative news coverage Raymond James has received regarding this and other recent regulatory cases probably won't hurt the company's ability to attract customers.

Most of Raymond James' more than 5,000 brokers work as independent contractors, which Fischer said means "the brokers own the relationship with the customer, not the brokerage firm."

The case involves Raymond James Financial Services, an independent contractor subsidiary, and Raymond James & Associates, a traditional full-service brokerage.

The NASD said Raymond James had no system in place for determining whether an account was appropriate or for reviewing its appropriateness periodically after the account was opened. If Raymond James had not chosen to discontinue the fee-based brokerage accounts, it would have had to hire an independent consultant to recommend such a system.

Helen Huntley can be reached at huntley@sptimes.com or 727 893-8230.

[Last modified April 28, 2005, 01:18:21]