Damned if you do, damned if you don’t. A common theme in the wake of 2008 was to bring legal action against advisors for losses resulting from overly-aggressive investments made (or recommended) on a client’s behalf. A new tactic is now emerging in the rebound since—overly-conservative investments that fail to capitalize on upside potential.
Fidelity Management Trust Company finds itself on the receiving end of a lawsuit that claims it made such conservative investments that “all relevant times had such low investment returns and high fees that it was an imprudent retirement investment,” according to the filing.
“Prior to 2009, Fidelity engaged in an imprudent investment strategy for the [the fund] that caused substantial losses and accordingly exposed itself and the [the fund’s] ‘wrap providers’ to substantial losses,” the suit reads. “Faced with a substantial decline in [the Fund’s] market value, and with resulting pressure from the wrap providers …Fidelity responded by adopting an unduly conservative investment strategy that was contrary to the purposes of stable value fund investing, agreeing to allow the wrap providers to charge excessive fees, and charging excessive fees for its own account.”
The claimants go further and accuse Fidelity of “exacerbating its fiduciary breach” by attempting to conceal its improperly conservative investment and excessive fees from investors by solely reporting to investors an inappropriate “money market” benchmark– rather than a proper stable value fund benchmark (as it had used at least to some extent in years past) – that made the returns appear to be competitive, when in fact, they were extremely poor.
Finally, the lawsuit cites the recent Tibble v. Edison International decision from the Supreme Court in arguing that Fidelity failed “to continuously monitor and supervise its affiliate to which it delegated day-to-day management. This failure to monitor and supervise its affiliate and failure to cause the affiliate to change course after years of underperformance provides an independent basis for liability under ERISA. See Tibble v. Edison International, __ U.S. __, 135 S. Ct. 1823, 1828 (2015) (a ‘trustee has a continuing duty to monitor trust investments and remove imprudent ones’).”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
