Compliance July 6, 2015

FINRA Forces Broker/Dealers to Pay $30M in Restitution

Wells Fargo, Raymond James and LPL have been ordered to pay more than $30 million in restitution, including interest, to customers for failing to waive mutual fund sales charges.
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The Financial Industry Regulatory Authority (FINRA) said it has ordered Wells Fargo Advisors, Wells Fargo Advisors Financial Network, Raymond James & Associates, Raymond James Financial Services, Inc. and LPL Financial to pay more than $30 million in restitution, including interest, to affected customers for failing to waive mutual fund sales charges for certain charitable and retirement accounts.

Wells Fargo, Raymond James and LPL have agreed to pay affected customers an estimated $15 million, $8.7 million and $6.3 million, respectively. In addition to this amount, LPL will be paying restitution to eligible customers who purchase or purchased mutual funds without an appropriate sales charge waiver from January 1, 2015, through the date that the firm fully implements training, systems and procedures related to the supervision of mutual fund sales waivers.

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Class A shares typically have lower fees than Class B and C shares, but charge customers an initial sales charge. Many mutual funds waive their upfront sales charges on Class A shares for certain types of retirement accounts, and some waive these charges for charities.

Mutual funds available on the retail platforms of Wells Fargo, Raymond James, and LPL offered these waivers to charitable and retirement plan accounts under limited circumstances and disclosed them in their prospectuses, according to FINRA’s statement. However, at various times since at least 2009, Wells Fargo, Raymond James and LPL did not waive the sales charges for affected customers when they offered Class A shares. As a result, more than 50,000 eligible retirement accounts and charitable organizations at these firms either paid sales charges when purchasing Class A shares, or purchased other share classes that unnecessarily subjected them to higher ongoing fees and expenses. 

Wells Fargo, Raymond James and LPL failed to adequately supervise the sale of mutual funds that offered sales charge waivers, FINRA said. The firms unreasonably relied on financial advisers to waive charges for retirement and eligible charitable organization accounts, without providing them with critical information and training. 

In concluding the settlements, Wells Fargo, Raymond James, and LPL neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

“In this case, FINRA is ordering meaningful restitution to adversely affected investors consistent with our commitment to ensure that mutual fund investors get the full benefit of available fee and expense reductions,” Brad Bennett, FINRA’s executive vice president and chief of enforcement, said in a statement. “While Wells Fargo, Raymond James and LPL failed to ensure that customers received these discounts, FINRA’s sanctions acknowledge that the firms detected and self-reported these errors, and will provide full restitution to customers.”

Data & Research July 6, 2015

Few Investors Grasp Long-Term Potential of HSAs

Given the tremendous health care costs people will face in retirement, HSAs can be a significant tool.
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Most employees who have access to health savings accounts (HSAs) mistakenly think these work like flexible spending accounts (FSAs)—if they don’t use their balance in a given year, they will lose it. Thus, the majority of HSA holders use them only for current health care expenses. This is according to a new report from UMB Healthcare Services, “HSAs Build Long-Term Wealth with Tax-Favored Savings.”

That misconception is not surprising, given the fact that HSAs are still fairly new and are rarely included in benefits education and communications, writes Dennis Triplett, chairman of UMB Healthcare Services, in the report.

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UMB analyzed the balances of 440,000 HSA investors in 2014 and found that they had an average balance of $1,874—far lower than the annual maximum contribution the Internal Revenue Service (IRS) allows. For 2015, the limit is $3,350 for individuals, $6,650 for family coverage, plus a $1,000 catch-up for people over 55 years old.

Given the fact that the Employee Benefit Research Institute (EBRI) calculates that a couple retiring at age 65 today will need nearly $300,000 to cover their health care costs in retirement, retirement plan advisers should emphasize the benefits of long-term investing and maximizing HSAs, UMB Healthcare Services suggests.

For instance, UMB projects that a 40-year-old employee earning $80,000 who starts to maximize his HSA contributions and earns a 5% return will have more than $306,000 by age 65. UMB also notes that whereas 401(k) investments and withdrawals are tax deferred, they are not taxed in an HSA.

UMB suggests that advisers can help their sponsor clients to look for HSAs that offer robust investment options and proactive education.

In conjunction with the white paper, next month, UMB will launch a tool for HSA investors called UMB HSA Saver—a dashboard that will show account holders their current investments and enable them to research other investment options.

The UMB report comes on the heels of a report from AvidaBank that predicts a wave of investing in HSAs that will boost assets from $3 billion invested today, to $12 billion in 2017 and $40 billion in 2020.

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