Raymond James Financial, Inc. (RJF) made a smart move yesterday by sparing its advisors from shelling out additional wrongful fees charged to certain mutual funds clients and announcing that such rebates will be reimbursed by the company. The altered tactic will help the company in winning advisors’ applause at the cost of increased expenses.
Issue in Detail
Last week, the matter came into light when several advisors were sent notice by Raymond James instructing them to repay fees accumulated from certain clients by not providing the fee waivers they were eligible for or by incorrectly selling costly classes of mutual funds in their accounts.
The company discovered this error during the operational review it carried out after Merrill Lynch, the wealth management division of Bank of America Corporation (BAC), was fined by the Financial Industry Regulatory Authority (FINRA) last June on account of its failure to waive mutual fund sales charges on Class A shares for charities and retirement accounts.
Certain mutual funds relinquish sale charges for Class A shares that are sold to charities and retirement accounts. Class A mutual fund shares usually charge a front-end load and have lower management fees compared to Class B or C shares.
Raymond James also provides such waivers as mentioned in its prospectus. However, the company while evaluating the past five-year accounts discovered that the advisors failed to offer these waivers to the qualified clients and in few cases, acquired Class C shares instead of Class A in the customer accounts. This resulted in incorrect charging of commissions to these clients.
Present Status
Though Raymond James opted to clear things out by asking advisors to pay back clients before the regulatory intervention, advisors were irked claiming that the company’s action painted them in a bad light.
However, the company’s latest decision to call off the clawback plans and blame the error on lack of clarity in prospectuses, policy disparity among fund companies and a gap in the industry’s and the company’s abilities to systematically identify waiver availability will be appreciated by the advisors.
In addition, the company is looking forward to update its mutual fund order system to deal with the waiver problems. This will help the company as well as advisors in minimizing such discrepancies in the future.
Nevertheless, Raymond James will have to pay for this negligence in the form of higher expenses in the upcoming period. The company had already announced a $10.5 million adjustment associated with mutual fund commissions during its first-quarter fiscal 2015 earnings release.
Our Take
Raymond James’ efforts to resolve the matter upfront and coming forward to reimburse clients will earn it brownie points from advisors, clients as well as regulators. However, elevated expenses may weigh on profitability in the next earnings report.
At present, Raymond James carries a Zacks Rank #3 (Hold). Some better-ranked investment banking firms include Investment Technology Group Inc. (ITG) and JMP Group LLC (JMP). Both these stocks hold a Zacks Rank #1 (Strong Buy).
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