By JLP | October 31, 2006
Here’s today’s Question of the Day:
I realize that MOST of the readers of this blog are do-it-yourselfers and would NEVER use a full-service broker. However, I still wanted to ask this question in light of an article ($)I read in today’s Wall Street Journal about Jim Weddle, the new head of Edward Jones. For those of you who may not be familiar with the story, Edward Jones recently settled a case (without admitting or denying guilt) for $75 million dollars for failing to disclose their revenue-sharing arrangements with mutual fund providers to their clients. They also agreed to pay $127 million to settle nine class-action lawsuits that were related to the scandal.
Revenue-sharing agreements are arrangements in which a mutual fund family pays the brokerage firm extra fees or commissions for selling their product. The brokerage firm then pays the brokers more commissions to sell that particular mutual fund. So, a broker may earn 4.5% commission for selling mutual fund “1” but earn only 4% commission for selling mutual fund “2.” Which fund do you think he wants to sell? In addition, lots of mutual fund families used to sponsor trips for those brokers who sold the most of their mutual funds. Isn’t that the same thing? My guess is that this little tidbit of information was never divulged to clients. “By the way Mr. and Mrs. Smith, this mutual fund sale just won me an all-expenses paid trip to Bermuda. Thanks for your business.” Not gonna happen. What I don’t understand is why Edward Jones was singled out for doing something that ALL FIRMS do (or did do).
I thought this quote by Mr. Weddle regarding the lawsuit was interesting:
The scandal eroded morale inside Jones and hurt the firm’s recruiting efforts, Mr. Weddle says. “We took it incredibly personally and felt it was difficult to communicate our side of things,” he says. “It is not like we set out to hide our arrangements but now we disclose what we do and then some,” he says.
They “felt it was difficult to communicate [their] side of things?” What could “their side of things” be?
Regardless, my advice is BUYER BEWARE!