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Brokers Eat Their Own

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It would be difficult to find an industry as ethically bankrupt as those involved in "managing" your investments. The harm these "advisers" have done to the retirement aspirations of hardworking Americans is incalculable.

Almost every week, my view that this industry will do and say almost anything to line its pockets is validated. This week, New York Attorney General Eric Schneiderman filed a lawsuit against Credit Suisse alleging it deceived investors when it sold them mortgage-backed securities before the financial crisis. Investors who bought these bonds suffered losses of $11.2 billion.

The U.S. Attorney for the Southern District of New York charged Mathew Martoma, a former portfolio manager at hedge fund giant SAC Capital Advisors, with using inside information about the clinical trial of an Alzheimer's drug to assist SAC in generating up to $276 million in profits.

You have a fighting chance of avoiding becoming a victim when you invest your own funds and avoid brokers. Unfortunately, you don't have this option if your employer offers a 401(k) plan and you want to take advantage of the employer match. Your investment options typically consist primarily of high cost, actively managed funds which are likely to underperform a globally diversified portfolio of index funds. These funds are chosen by the plan administrator, usually based on the recommendation of brokers or insurance companies who "advise" the plan.

A decision last week in Minnesota by United States District Court Judge Susan Richard Nelson in Krueger v. Ameriprise Financial (Case No. 11-cv-02781) illustrates the lengths to which members of the securities industry will go to profit from the investment options in 401(k) plans.

Ameriprise is a large holding company that provides a broad range of financial planning services. The lawsuit seeks class action status and was filed by three current and four former participants in the Ameriprise 401(k) plan. One of the primary allegations involves the selection of funds managed by a subsidiary of Ameriprise. The complaint states that the plan was the first investor in these funds, which had no performance history. Plan assets of approximately $500 million a year were invested in these funds, commencing in 1995. Plaintiffs allege the funds performed poorly, underperforming their benchmarks, and accused Ameriprise of generating excessive fees from these investments. Ameriprise moved to dismiss the complaint.

The District Court denied the motion to dismiss the claim relating to these funds, stating: "Plaintiffs in this case plausibly allege that Defendants selected Ameriprise affiliated funds, such as RiverSource mutual funds and non-mutual funds managed by ATC, to benefit themselves at the expense of participants." Counsel for the class representatives, Jerome Schlichter, of the St. Louis law firm of Schlichter, Bogard and Denton, stated: "Ameriprise certainly should know that their in house funds were poor choices for retirement assets."

This decision gives plaintiffs the opportunity to proceed with their case. It is not a finding of wrongdoing by Ameriprise. Nevertheless, it is illustrative of the cavalier attitude of plan sponsors. They are supposed to act as fiduciaries to plan participants by selecting investment options that are in the best interest of the participants. In my opinion, any plan that does not offer globally diversified portfolios of low management fee index funds should be deemed to violate this duty. Until the Courts adopt that position, lawyers will go after the low hanging fruit, and attack only the most egregious violations. The Ameriprise case fits well into this category. It's worse because it involves a large player in the advisory business placing its own interests above those of its employees.

The industry is so rife with greed that it eats its own.

Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read, and The Smartest Portfolio You'll Ever Own. His new book is The Smartest Money Book You'll Ever Read. The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.