It's not that I have anything against Ameriprise per se, but they are back in the news just as they were when I last posted on this blog at the end of August (see Ameriprise: American Express Reprise). Some companies have a way of generating negative publicity about themselves and Ameriprise (formerly American Express Financial Advisors) happens to be such a company.
Recently, NASD fined Ameriprise $500,000 for failure to supervise properly the sale of college savings plans (known as "529 Plans"). In addition, they were ordered to pay an additional $750,000 in restitution to investors for lost tax breaks.
What was Ameriprise's sin?
To understand Ameriprise's errant ways, you need to know a few basics about 529 Plans.
529 Plans are offered by all 50 states (plus a host of educational institutions) to help families save for college education expenses. Money saved in a 529 Plan can be spent at almost any college -- public or private, in-state or out-of-state. Generally, money is put into these plans on an after-tax basis and is invested to grow. The earnings on these contributions are not taxed when the money is eventually withdrawn from the 529 Plan to pay for higher education expenses. It's a pretty good savings tool.
It gets even better!
Some states go a step further and offer a tax incentive to their taxpayers by allowing them to deduct some amount of their contributions from their state income tax returns. For example, here in Michigan a married couple may deduct up to $10,000 in contributions from their Michigan income tax return, thus saving about $400 in state income taxes.
Back to Ameriprise.
It turns out that Ameriprise was aggressively selling only one state's 529 Plan -- the Wisconsin plan -- which just happend to be the only plan Ameriprise carried at the time. It didn't matter than many of Ameriprise's clients lived in other states which offered their residents tax incentives. No matter where anyone lived, all clients were advised to invest in the Wisconsin plan from May 2001 to October 2003.
Why did Ameriprise do this?
Follow the money -- that's the 529 Plan they got paid for selling! Based on the information I have, the commission for selling the Wisconsin plan was 5.75% at that time. If Ameriprise had recommended any other plans to their clients, then they would not have earned any commission.
This would have been okay if investors were getting a better deal by investing in the Wisconsin plan. I mean, if you're paying a commission it ought to be because you're receiving valuable advice that will make you more money in return. What else are you paying for? However, in February 2004, Morningstar released its first analysis of 529 Plans and ranked the Wisconsin plan near the bottom of the list.
That's adding insult to injury. So much for getting good advice in exchange for that handsome commission!
Thus, Ameriprise was recommending one of the worst state 529 Plans on the market even though many of their clients could have done better by investing in their own state's plan AND received a tax break for doing so. All because that's what made more money for Ameriprise and its representatives.
But, heh, whoever said Ameriprise is supposed to look out for your bottom line before theirs? The truth is they aren't obligated to. They look out for #1 -- themselves -- even if it means risking some fines from NASD.
Ignoring the issue of how your financial adviser gets paid is a huge mistake and it will cost you dearly.
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