A new lawsuit against LPL Financial purports to lift the veil on just how dependent some wealth managers have become on
A putative class action suit filed against LPL on Wednesday in federal court in San Diego paints a picture of a firm that has steadily become more and more reliant on interest earned on clients' uninvested cash to juice its total returns. In the last quarter of 2015, according to the suit, LPL derived 8.5% of its return on assets from its cash sweeps accounts. By the first quarter of this year, the suit alleges, that figure had risen to "an astounding 37.3%."
Although LPL "might still hold itself out as a brokerage and investment advisory firm, its current business model reflects a different commercial enterprise entirely," the suit states. "Rather than primarily generating revenue from the advisory services it provides to its customers, it instead now profits in large part from placing its customers' cash into banking and investment vehicles that are selected primarily for the benefit of [LPL], not the customer."
An LPL spokesperson declined to comment for this article. The lawyers who filed the case also declined to comment.
The lawsuit, submitted on behalf of a Michigan resident named Daniel Peters, is the latest in a series of recent filings taking big wealth managers to task for what lawyers argue are often
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Those banks then lend the money and collect interest from borrowers. The trouble, according to the suits against LPL and other firms, is that brokerage firms keep most of the resulting returns for themselves.
In this year's first quarter, the suit alleges, LPL generated a yield of 3.23% from its sweeps accounts. Meanwhile, clients received between 0.35% and 2.2%, depending on how much uninvested cash they had.
The suit alleges LPL's sweeps policies are designed to ensure: "(i) Defendant LPL will always receive the vast majority of the interest earned by its customers' cash holdings, and (ii) LPL's customers will always receive as interest on their cash holdings only a small fraction of the interest that their money would generate if placed in any other bank savings account or a typical money market fund."
Nearly identical accusations appear in similar putative class action suits recently filed against Morgan Stanley and Bank of America's Merrill.
Many of these suits note that investors could be reaping returns of around 5% if their cash was simply put into money markets or high-yield savings accounts. Tim Welsh, the CEO of the
"It's not just the difference between night and day," he said. "It's more like months apart."
Welsh said firms' burgeoning cash sweeps returns are in part the result of the
Welsh said he thinks the push toward commission-free trading on many brokerage accounts has led to fee compression and sent firms scrambling for other sources of income.
"There's no such thing as free," Welsh said. "Somebody's always paying for it. But they're being opaque about how you pay for it."
Bill Singer, a longtime securities lawyer and recently retired author of the
"In legal talk, that would have given them legal harbor," he said.
Still, he said, there could still be questions about why advisors with fiduciary duties to their clients wouldn't be seeking higher returns.
"It's not like the firm has earned anything through its hard work and investments," he said. "This is the firm taking money that it is just lending out and giving me 1%."
LPL is far from the only firm to reap large rewards from its cash sweeps policies.
Whether or not in response to legal pressures, firms have begun to raise the rates paid on sweeps accounts. Wells Fargo announced last week that it would increase the yields paid on uninvested cash, a change expected to cost it $350 million this year.
And on an
Wealth managers have long argued so-called sweeps accounts give clients a place to hold their money while deciding how much they want to put into stocks, bonds and other investments. Many also point out that sweeping uninvested cash into affiliated banks gives it the benefit of protection by the Federal Deposit Insurance Corporation. The FDIC insures up to $250,000 held in individual bank accounts and the same amount for each owner of joint accounts.
The suit against LPL accuses the independent broker-dealer of being deliberately misleading about how its sweeps policies can benefit investors. For instance, LPL's customer relationship summary — a document laying out all the different ways a firm makes money — states that the sweeps fees "we receive are typically higher than the interest you earn on the cash held in the bank accounts and are in addition to any fees you pay to us."
The suit contends LPL "always" reaps greater returns than its customers from its sweeps policies, not just typically. It also alleges the firm violated its fiduciary duty to serve clients' best interests.
Besides breach of fiduciary obligations, the suit accuses LPL of obtaining unjust enrichment, violating California laws banning unfair and fraudulent business practices and breaching contracts. It seeks actual and punitive damages and puts the amount involved in the dispute in excess of $5 million.
