Dec. 2, 2005 - Ameriprise in More Hot Water

I thought we were done with Ameriprise. Then I opened today's Wall Street Journal and learn they are once again paying big fines to the Securities & Exchange Commission (SEC) and the National Association of Securities Dealers (NASD) for more bad behavior -- to the tune of $57.3 million! Like I said yesterday, some companies are just magnets for bad news.

Here's the breakdown:

• $30.0 million for recommending "preferred" mutual funds to clients and not disclosing to those clients that Ameriprise had "revenue sharing" arrangements with the providers of those "preferred" mutual funds. In other words, Ameriprise was being paid by certain mutual fund companies to get on its "preferred" mutual fund listing. That's right, Ameriprise's clients' well-being was sold to the highest bidders.

• $12.3 million for also pushing the mutual funds of certain mutual fund companies who steered their stock trading through Ameriprise's brokerage unit. This is known as "directed brokerage" in industry parlance. Us regular folks know it as "you scratch my back and I'll scratch yours." Unfortunately, Ameriprise's clients were getting clawed rather than scratched. 

• $15.0 million in disgorgement and civil penalties related to the above actions.

There you have it -- $57.3 million down the tubes! So now Ameriprise has learned its lesson, right?

But here's the dirty little secret behind the headlines.

Of the two infractions noted above, the second one (directed brokerage) is against the rules. We shouldn't see this one repeated unless Ameriprise is just plain stupid (but nothing is beyond the realm of possibility when money is involved).

However, the first infraction (revenue sharing) is perfectly legal. Ameriprise only got into trouble for not telling clients in advance that the company had these arrangements with some mutual fund providers. In other words, it is perfectly fine for a financial advisory firm to put its interests (greed) above that of its clients as long as they make that fact known up front. Doesn't that sound like a deal?

This inconvenient fact, of course, is never openly discussed with your financial adviser (unless you bring it up). Instead, the warnings are tucked away in neat little "disclosure" pamphlets or contract fine print which no one bothers to read. (Just like no one reads software licensing agreements before clicking the "I agree" button.)

That's exactly how they want it to be.

What you want is to do business with an adviser that is bound by a fiduciary responsibility to act in your best interests at all times.