Fidelity Sales Practices Violated Reg BI, Advisor Says in Whistleblower Suit

What You Need to Know

Low-cost index funds hit Fidelity’s revenue, prompting a focus on more profitable products like managed money, the advisor’s suit claims.
The suit says advisors were pressured to sell higher-revenue products even when they were not in clients’ best interest.
Fidelity says it denies the allegations and will vigorously defend itself.

A former Fidelity Investments financial advisor has filed a lawsuit alleging the company fired him in retaliation for his whistleblowing over practices intended to prioritize firm profits over customer finances.

The case revolves around the investment giant’s “repeated breaches of its fiduciary obligation” to act in investors’ best interests and what happened when the advisor “blew the whistle,” plaintiff Michael Maeker alleges in a lawsuit filed Monday in U.S. District Court in Texas’ northern district.

Fidelity’s actions have cost Maeker millions in damages and violated U.S. whistleblower protections, he contends.

“This is not a ‘he said/he said case,’” the lawsuit states, citing “strong evidence” that Fidelity violated securities laws and the Securities and Exchange Commission’s Regulation Best Interest, which governs broker-dealer conduct. Maeker says the Reg BI violations stopped after he was fired.

Maeker, a registered financial advisor for 26 years — 24 of them with Fidelity — who said he recorded his branch manager and Fidelity executives, contends that he and other advisors were pressured to place client assets in investments that paid Fidelity “even if that was not in the client’s best interest.”

Tiers of Investments

Fidelity categorizes financial investment products in three categories: Tier 1, Tier 2 and Tier 3; Tier 1 investments generate the lowest revenues for Fidelity, Tier 2 the second highest revenues and Tier 3 the highest revenues and profits for Fidelity, according to the lawsuit.

“Fidelity pressured its branch managers to pressure Fidelity’s financial advisors to persuade investors to place their assets into Tier 3 investments that generated higher revenues for Fidelity,” the complaint states.

“A significant portion of Fidelity’s branch managers’ compensation was based on how much investors’ assets were placed into financial products that generated higher revenues for Fidelity. Further, Fidelity circulated charts ranking the branch managers in a region based on the amount of investors’ assets in Tier 3,” the suit contends.

Fidelity pushed for clients to move assets into Tier 3 accounts because, with the advent of low-cost index mutual funds, the company was generating significantly lower revenue from mutual funds than it had previously, the suit claims.

The lawsuit contends a Dallas branch manager “continuously pressured Maeker to push clients into unsuitable or ill-advised, high fee generating financial investments that would make Fidelity more money — regardless of investors’ best interest.”

“Fidelity used both a carrot and stick approach to incentivize and pressure FAs to push clients to invest in Tier 3 financial products,” with advisors receiving higher compensation for getting clients to move assets and pressure to get “on board” or be fired, Maeker’s complaint says.

Tier 1 assets comprise CDs and Treasurys; Tier 2 bonds, ETFs and mutual funds; and Tier 3 includes managed money, equities, alternatives and options, Maeker’s attorneys told ThinkAdvisor by email Wednesday.

The lawsuit cites a statement from another advisor who said instructions from Fidelity to advisors “changed from telling us that a successful client meeting regarding their (assets under management) went from giving the client advice and guidance to getting the client to put their AUM into” Tier 3 “PAS or WAS accounts.”