• Edward Jones: Nabbed Edward Jones: Nabbed By the St. Louis Post-Dispatch – December 24, 2003 From where the small investor stands, Wall Street is one, grand, multilayered conflict of interest. Brokers and brokerage houses often get paid more for
• Edward Jones: Nabbed
Edward Jones: Nabbed
By the St. Louis Post-Dispatch – December 24, 2003
From where the small investor stands, Wall Street is one, grand, multilayered conflict of interest. Brokers and brokerage houses often get paid more for offering other than their best advice to small investors. The government’s $75 million settlement with the Edward Jones brokerage will lessen the impact of one particular conflict among many. But the government should go further.
Edward Jones, which is based in Des Peres, employs more than 4,000 people in St. Louis, and is generally a good corporate citizen. It preaches a conservative buy-and-hold philosophy that serves investors better than the hurry-up-and-buy pitch that boosts profits at other firms. So it’s painful to see the firm lower itself through acts of greed that ill-serve its customers.
Jones was nabbed for a practice nicknamed “pay for play.” Big mutual fund companies agreed to kick back money to Jones if Jones would funnel lots of investor cash into their mutual funds. This practice is legal – and sleazy.
To get the requisite cash flowing, Jones put the favored fund companies on its “preferred” list and sweetened the reward for brokers who sold them. At least 95 percent of Jones’ fund sales went to those preferred funds.
Jones says that the firm thought those funds would serve its customers well. Still, Jones’ own profit was obviously a big motivation in pushing funds that scratched the firm’s back. In regulators’ minds, Jones’ sin was its failure to disclose these back-door payments to its customers, and the agreement forces the firm to do so.
That’s right as far as it goes. But the major problem is that pay for play is legal.
Small investors come to full-service brokers such as Edward Jones precisely because they know little about investing and need advice. They are naifs wandering in a land of Wall Street wolves.
Those wolves have a taste for small investors. We’ve seen over the past few years how the sharp-toothed creatures in Wall Street management turned stock analysts into shills, touting the stock of their investment banking clients to the detriment of their small investor clients. Brokerages, annuity companies and other players structure rewards in ways that tempt sales people to put their own paychecks above their clients. Mutual fund kick-backs are part of that.
Better disclosure will rescue some investors. But others, perhaps most, will trust their brokers. Pay for play in mutual funds should be illegal.
The $75 million extracted from Jones will be used to repay its investors. But $75 million doesn’t equal Jones’ profit from its improper practices. California Attorney General Bill Lockyer says Jones reaped about $300 million since 2000, according to the Wall Street Journal. But the company still faces a raft of lawsuits, including one from Mr. Lockyer’s office.
And its carefully built reputation – as the down-home, easy-going alternative to city-slicker stock brokers – has taken a drubbing. By the time it’s over, this misadventure may cost Edward Jones far more than cash.
