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New Hampshire Sues Amex Financial Advisors

February 19, 2005
New Hampshire regulators are suing American Express, charging that the company illegally rewarded financial advisers who steered clients toward underperforming in-house mutual funds.

AEFA • Client Complaints • NH Sues AEFA

The New Hampshire Bureau of Securities Regulation filed the action against American Express Financial Advisors (AEFA), an American Express subsidiary based in Minneapolis that provides financial advice and brokerage services to clients.

Deputy Bureau Director Jeffrey Spill said that AEFA advisors, for a fee, held themselves out as investment advisors, but often times did not act in the best interest of their New Hampshire clients.

In many cases clients were sold financial plans that were heavily weighted with American Express mutual funds.

In one sales contest, American Express offered its advisers who sold the most company funds a free one-year lease of a Mercedes Benz.

American Express had previously disclosed that the Securities and Exchange Commission was investigating its fund sales practices. Earlier this month, it announced plans to spin off the unit, which employs 12,000 advisers.

"A financial planner or investment advisor has a fiduciary duty to act primarily for the benefit of the client," said Spill. "In this case, AEFA financial advisory plans were often merely a vehicle to promote and sell lackluster American Express mutual funds, when in fact AEFA had a duty and responsibility to promote a wide variety of products available in the industry," Spill said.

AEFA financial advisors also sold other specially selected funds which had a special financial revenue sharing relationship with AEFA and engaged in directed brokerage arrangements with several mutual fund companies, the state charged.

Mutual fund companies whose shares were sold by AEFA would allegedly direct extra brokerage commissions to AEFA's broker-dealer in exchange for "shelf-space" for the mutual fund.

"Although AEFA made some disclosures to its customers regarding AEFA's conflicts of interest, the disclosures were inadequate and failed to reveal the extensive nature of the conflicts of interest driving the sale of American Express mutual funds and other proprietary products," said Spill.

AEFA also failed to disclose to investors the consistently mediocre performance of American Express funds as compared to other fund products.

Spill said the Bureau became aware of AEFA practices through an audit initiated last year. Bureau staff found that many New Hampshire clients' financial plans were populated with a high number of American Express mutual funds, even though historically those funds have shown mediocre performance.

In addition, numerous emails were uncovered indicating an aggressive effort by AEFA management to pressure their financial advisors to sell American Express mutual funds, while other employees were questioned for not doing so. AEFA also failed to disclose its financial advisors were trained only to recommend American Express products, and they were operating in a sales culture which measured their performance based on the sale of proprietary products.

The state's petition orders AEFA to pay an administrative fine and restitution of financial planning fees of up to $17.5 million dollars.

Also, under the petition, AEFA must pay disgorgement of all fees paid to them during the relevant time period related to revenue sharing and directed brokerage agreements. AEFA must also retain an independent consultant who shall determine the amount of restitution to be paid by AEFA for the investment plan fees paid by New Hampshire clients during the relevant time period. AEFA must also pay the cost of the investigation in the amount of $200,000.

Regulators called the firm's disclosures of the incentives "inadequate, obscure and misleading."

American Express Financial Advisers Inc. disputed some of the charges. It said it had not paid extra compensation for selling in- house funds "for the past several years."

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