In their latest lawsuit questioning firms' "cash sweeps" policies, plaintiffs' lawyers have come around to JPMorgan and Raymond James.
A legal team that has already sued Wells Fargo, LPL Financial and Ameriprise filed a putative class action against JPMorgan in federal court in New York on Friday alleging the megabank doesn't look out for its clients' best interests with its handling of their uninvested cash. Meanwhile a separate group of law firms, already pressing suits against Morgan Stanley, UBS, LPL, Wells Fargo and Ameriprise, is now leveling essentially the same claims against Raymond James.
All of the filings make the same general accusation: That large wealth managers use uninvested cash held in advisory and brokerage accounts to boost their bottom lines rather than benefit clients.
The new suit against JPMorgan, for instance, contends the megabank takes "for itself and its affiliates the vast majority of the compensation earned from its customers' cash at the expense of its customers and principals, who receive only a minimal return on their cash deposits."
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A JPMorgan spokesperson declined to comment.
The suit against Raymond James similarly alleges, "Raymond James makes more money when its clients' funds are invested in the Raymond James cash sweep programs rather than in similar cash options and equivalents because Raymond James' cash sweep programs offer unreasonably low interest rates."
Raymond James did not immediately respond to a request for comment.
Likely more to come
Tim Welsh, the CEO of the industry consulting firm Nexus Strategy, said many firms' cash sweeps yields became questionably low when the Federal Reserve's rate-hiking campaign of the past two years made better-returning alternative investments easily available. In a bid to combat inflation, the Fed increased its target rates 11 times between March 2022 and July 2023, bringing them to a range of 5.25% to 5.5%.
Firms could have shared a sizable portion of the increased returns with clients, Welsh said. Instead, most chose to keep the lion's share for themselves. So he expects the suits will continue to pile up, he said.
"Every company saw others taking advantage of this and did the same thing," Welsh said. "I think this is just the beginning of the unraveling."
Acting as a 'double agent'
Like most of the firms hit with sweeps lawsuits, JPMorgan and Raymond James both move uninvested cash clients have in their accounts over to an affiliated or unaffiliated bank. In JPMorgan's case, it's swept over to JPMorgan Chase Bank. In Raymond James' it goes to institutions listed on a "bank priority list."
Firms generally defend cash sweeps by arguing they want to have clients' uninvested cash protected by the Federal Deposit Insurance Corp., which guarantees as much as $250,000 in individual accounts. But JPMorgan is actually acting as a "double agent," alleges the suit filed by representatives of Berger Montague of Philadelphia and Rosca Scarlato of Beachwood, Ohio.
The firm's sweeps policy is really set up to benefit the firm and its affiliated bank more than its clients, according to the suit. What's more, it says, JPMorgan doesn't adequately disclose how much of its sweeps returns are used to boost its bottom line instead of being distributed to customers.
The suit against Raymond James, filed by lawyers from Simmons Hanly Conroy of San Francisco, Williams Dirks Dameron of Kansas City and Oakes & Fosher of St. Louis, compares the returns offered on the firm's sweeps accounts with yields from other brokerages. Raymond James, for instance, pays anywhere from 0.25% (for anything under $100,000 in a sweeps account) to 3% (for $10 million or more.) Meanwhile, Vanguard pays 4.6% and Interactive Brokers pays 4.83% no matter the amount, according to the suit.
Raymond James comfortable with rates
Speaking in a third-quarter earnings call last month, Raymond James CEO Paul Reilly noted that only about 2.5% of the assets held in the firms' fee-based accounts was in the form of uninvested cash. Chief Financial Officer Paul Shoukry, who has been named as Reilly's successor for the top spot, said in the same call that he and other executives are comfortable with the yields offered through Raymond James' sweeps policies.
Analysts asked both Reilly and Shoukry if their firm was subject to the same pressures that had led rivals Morgan Stanley and Wells Fargo to announce hikes to their sweeps rates. Morgan Stanley attributed its increase to "competitive dynamics," and both firms have meanwhile said they have been responding to Securities and Exchange Commission inquiries into their sweeps policies.
"I don't know what's happening in some of the other programs," Shoukry said in the earnings call, according to a transcript from Seeking Alpha. "I can tell you ours are well thought through, we think are very compliant. And as we look at the announcements and changes, they're not very specific yet, right? So we've prided ourselves … maybe at times for having such high sweep rates."
Seeking class status
The new suits against JPMorgan and Raymond James both allege the firms have breached their fiduciary duty to always put their clients' interests first. The suit against Raymond James additionally accuses the firm of violating Regulation Best Interest, which requires brokerages generally to do what's best for clients and disclose conflicts of interest.
Like all the other cash sweeps suits, the new ones against JPMorgan and Raymond James were filed on behalf of single named plaintiffs. In JPMorgan's case, it's an Illinois resident named Dan Bodea. In Raymond James' case, it's a Florida resident named Toni Conran. But the firms pressing the case are seeking class-action status to represent other JPMorgan clients allegedly harmed in the same way.
Yet another firm, Gibbs Law Group in Oakland, California, is pursuing much the same strategy in the third sweeps-related suit filed so far against Wells Fargo. Gibbs is also working with Berger Montague on another suit directed at Ameriprise, filed on behalf of a California resident named Mark Frey.
— This article has been updated to include the news of lawsuit against Raymond James as well as expert opinions and other insights.
