American Express Co.'s financial advisory unit violated its fiduciary duty to clients when it provided secret incentives to its sales force to sell poorly performing in-house mutual funds, instead of investments from competitors, New Hampshire regulators allege, according to The Wall Street Journal.
American Express Financial Advisors rewarded its sales staff with higher bonuses, more praise and in some cases with free one-year leases on Mercedes-Benz cars, for selling the proprietary funds. The New Hampshire Bureau of Securities Regulation investigated the unit's sales practices between 1999 to 2003 and asked a hearing officer to impose penalties of up to $17.5 million, including restitution.
The complaints are particularly scarring because earlier this month American Express proposed to spin off Minneapolis-based American Express Financial Advisors, which analysts value at $10 billion. New Hampshire regulators said that poor returns from American Express funds hurt investors. Regulators also found fault with the way American Express disclosed the conflict of interest to its customers. The disclosures were less detailed and "evolved from nonexistent to vague legalese," according to Mark Connolly, director of the New Hampshire Bureau of Securities Regulation.
The unit also paid its executives handsomely for promoting its funds. For instance, in 2003, Larry Post, American Express Financial Advisors group vice president for New England, received more than $1 million in compensation, which included roughly $900,000 in bonuses, some of which were linked to sales of proprietary products.