Financial Planners Red Flags
See the online story here: New York Times
or read the transcribe below.
If you're a company trying to persuade Americans to trust you with their money, the last thing you want is former employees accusing you of cheating them out of theirs.
But that is the odd position Ameriprise Financial, the largest employer of certified financial planners in the United States, finds itself in at the moment. Late last month, six people, including one current employee, sued the company, accusing it of stuffing its 401(k) plan with expensive, underperforming mutual funds that came from the company's own investment management arm.
The law firm behind the suit, Schlichter, Bogard & Denton, in St. Louis, now inspires fear and dread in employee benefits circles, since the suit is one of several it has filed against a variety of companies. Ameriprise was quick to dismiss this suit as a copycat.
But this is the first time that the law firm has gone after an employer that is a financial services company. It has to be frustrating for Ameriprise to see its menu of mutual funds splayed out for all of the world to see, complete with details on poor performance and a handy chart showing fees that are three to five times what they are at Vanguard.
If you are in search of financial planning, however, the suit is a test of sorts. If it turns out that Ameriprise didn't even get its own 401(k) right, why would you put your financial future in the company's hands
Ameriprise has been around in one form or another since 1894. It eventually came to be known as Investors Diversified Services, or I.D.S. for short. American Express bought the company in 1984, then spun it off in 2005, at which point it assumed its current name.
To their credit, Ameriprise representatives, many of whom are independent franchisees, generally begin their relationships with customers by creating a financial plan. Traditional brokers don't always do this and often worry only about investments, which is sort of like prescribing drugs without first taking a full medical history.
Once the plan is complete, however, things have sometimes gone awry over the years. There have been garden-variety problems, things that many brokerage firms have gotten into trouble for, like improper mutual fund trading, lost laptops packed with private customer data and the steering of customers to investments that provided extra commission to Ameriprise advisers.
But then there are the more unusual episodes. In at least three states, regulators fined the company because some Ameriprise advisers were forging client signatures. In New Hampshire, company representatives referred to their brief absences from the office, when they were supposedly rounding up signatures, as "taking a 10-minute trip to Kennebunkport."
Then there is the Medical Capital fiasco, in which brokers at Securities America, an Ameriprise unit at the time, sold hundreds of millions of dollars in supposed medical bill receivables in what later turned out to be essentially a Ponzi scheme. Medical Capital had no audited financial statements and senior Securities America executives expressed concern about this, but the brokers sold the notes anyway, according to documents Massachusetts securities regulators released. In a statement, Securities America noted that audited financial statements were not a legal requirement in this instance.
Medical Capital used the money it received to buy a yacht and invest in a company that produced pornography sites for people who like bisexuals, bondage and gay Asians, according to Jeffrey R. Sonn, a Fort Lauderdale, Fla., lawyer who represented Medical Capital investors. In April, Ameriprise paid about $150 million to settle the matter. As always with these sorts of things, the company neither admitted nor denied wrongdoing. Ameriprise recently sold Securities America.
In a perfect world, customers would never come close to ending up in these kinds of situations. This is how things are supposed to work at Ameriprise: You meet an adviser, you pay for a financial plan and then the adviser helps you carry it out. Ideally, any advisers in this situation, no matter where they work, then select the best investments and insurance on earth to put you in.
Here's where it starts to get murky, though. Ameriprise's combined revenue from its internal insurance, annuities and mutual funds is much higher than what it earns from financial planning. So while advisers aren't paid more to push the company's own products than they are to sell somebody else's, the company's success depends in no small part on them doing that anyway.
"Can people work in that environment and give good advice??" said Dan Candura, a 20-year veteran of Ameriprise's predecessor companies who ran an adviser quality initiative there. "They can. But they are not going to set sales records, and it's easier to sell the bad stuff than the good stuff."
In the J. D. Power & Associates 2011 ranking of full-service brokerage firms, Ameriprise ranked a bit above average. It did better than Merrill Lynch but worse than Fidelity and Charles Schwab. Ameriprise says it has a 93 percent annual client retention rate, though it is not clear how many of those people stick around because the terms of their insurance products make it uneconomic for them to switch.
The biggest potential red flag for Ameriprise customers, however, is adviser compensation. The representatives have a fair bit of leeway in how they charge, as the company's own securities filing makes clear. It notes that compensation is "determined by a schedule that takes into account the type of service or products provided, the type of branded adviser affiliation and other criteria."
So you have to ask for a "schedule" to figure out what's going on here. And keep in mind that advisers may earn any number of fees from mutual fund companies whose funds they sell and commissions from Ameriprise's own insurance and annuity offerings, though the company has recently opened its variable annuity platform up to a few other providers.
And about those annuities - again, from the company's filings: "Variable annuities provide us with fee-based revenue in the form of mortality and expense risk fees, marketing support and administrative fees, fees charged for optional features elected by the contract holder and other contract charges." And that's before you pay fees related to any underlying investments.
"All of these things are drafted by an attorney," said Don Froude, the president of Ameriprise's advisers group. "But at the end of the day, if you ask me how much you're paying and what value you're getting for that, I'd submit that you would get an answer you'd understand 10,000 times."
And it's crucial to ask and then add up all the numbers, since the company has a bit of a reputation for offering what came to be known internally as "Happy Meals" to customers. The meal would consist of a suite of products, often ones that customers could buy over time even if they didn't have a lot of money at first, that earned hefty fees and commissions for Ameriprise advisers. "It's attractively packaged and sounds like it's good for us," said Mr. Candura, the former Ameriprise executive who now runs his own financial planning firm and conducts ethics training for other advisers. "But we don't often read the labels."
All the Ameriprise executives I spoke with said they had never heard of the "Happy Meal" phrase. "There is this perception that dogs us, and it's getting quite frustrating," said Ted Truscott, Ameriprise's chief executive of asset management. "People want to write this story. It's very old news, and it's just not factual."
I genuinely hope that he is right. The country needs a fleet of financial planners to work with people who don't have $500,000 or more in assets. We need trusted professionals who start with a plan and don't use it as a vehicle to push their own products. And for most people, it shouldn't require paying 2 or 3 percent of their net worth in fees or take more than a handful of hours of a professional's time each year.
As for Ameriprise's 401(k) plan for its employees, there may well be areas where it has broken the rules. But it is hard to have a ton of sympathy for aggrieved employees in one important respect. If you work for the dog food makers, they are probably going to serve you some dog food. And some of it may not be your favorite variety.