Ameriprise and Wells Fargo Sued Over Low Interest on Client Cash

What You Need to Know

At least four firms face legal action over their cash sweep program interest rates.
Rates for sweep accounts at Vanguard and Interactive Brokers are much higher than at Ameriprise, a complaint details.
In November, Wells Fargo disclosed an SEC inquiry concerning its sweep programs for certain account types.

Clients of Ameriprise Financial and Wells Fargo filed proposed class action lawsuits this week alleging that the firms used customers’ cash balances to enrich themselves at clients’ expense.

The suits follow a similar client complaint earlier in July against LPL Financial and another in June targeting Morgan Stanley.

“This case concerns a simple ruse,” sates the suit against Ameriprise, filed Monday in U.S. District Court in Minnesota.

“Instead of fulfilling its fiduciary duties, contractual obligations and a regulatory mandate to act only in the best interests of their clients, (Ameriprise Financial and related entities) implement a scheme whereby they use their clients’ cash balances to generate massive profits for themselves while shortchanging their clients,” it explained.

The lawsuit by Ameriprise clients Susanne Mehlman and Joy Hultman contends that the $1.4 trillion financial services company uses its cash sweep program to move customers’ uninvested funds into bank accounts with interest rates “that are neither reasonable nor in compliance with its legal duties.”

As of June 18, interest rates for cash sweep accounts ranged from 0.30% for balances under $100,000 to 2.18% for those $5 million and higher, the lawsuit says. These rates “are significantly lower than sweep programs at other brokerage and advisory firms,” the complaint alleges.

Vanguard’s sweep account, for example, pays 4.6% for balances ranging from below $100,000 to $1 million, while Interactive Brokers pays 4.83%, it says.

“The interest rates Ameriprise pays to its clients in the sweep accounts violate Ameriprise’s duties to its clients because the rates are not reasonable, which constitutes a breach of Ameriprise’s fiduciary and contractual duties to its clients and a violation of Regulation Best Interest,” which requires broker-dealers to act in clients’ best interests, the suit contends.

As an investment advisor, the suit says, Ameriprise owes clients a fiduciary duty, and, as a broker-dealer governed by Reg BI, the firm must place its clients’ interests above its own.

“Ameriprise has devised a scheme in which Ameriprise makes significant profits on advisory customer cash balances, while the advisory clients, to whom a fiduciary duty is owed, actually (lose) money on their cash balances,” the complaint contends.

The lawsuit, which demands a jury trial, alleges breach of fiduciary duty, unjust enrichment and breach of contract. It makes similar claims as the lawsuit filed in June against Morgan Stanley in U.S. District Court for the Southern District of New York. The plaintiffs in the two cases share at least three attorneys, court records show.

Wells Fargo Suit

On Tuesday, Wells Fargo Advisors client Keith Bujold filed a similar proposed class action complaint in U.S. District Court for the Northern District of California, contending that the company used its cash sweep programs “to generate enormous fees for itself at the expense of its customers who receive only a minimal return on their cash deposits.”

LPL Suit

Meanwhile, on July 17, LPL Financial client Daniel Peters filed a proposed class action lawsuit in U.S. District Court for the Southern District of California alleging breach of fiduciary duty, unjust enrichment, breach of contract, and unfair or fraudulent business practices claims under the California Unfair Competition Law, also citing the firm’s obligations under Reg BI.

Peters contends that LPL’s two cash sweep programs “generate substantial revenue for LPL while at the same time providing little to no benefit to (its) customers.” The programs have “transformed into an aggressive and unlawful effort to maximize (LPL’s) profits at the expense of its customers,” his complaint alleges.

In most managed customer accounts, LPL customers “lose money on their cash positions while LPL reaps substantial profits from that cash,” the suit contends.

The lawsuit alleges that the sweep programs are designed to ensure that LPL “will always receive the vast majority of the interest earned by its customers’ cash holdings” and “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.”

The same law firms represent the plaintiffs suing LPL and Wells Fargo, court records show.

Wells Fargo had no comment on the case, a spokesperson told ThinkAdvisor by email Wednesday. Ameriprise and LPL representatives didn’t immediately respond to email messages Tuesday seeking comment. Morgan Stanley declined to comment on the client complaint against it.