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Regulation and Compliance > Litigation

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

By Dinah Wisenberg Brin

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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.” 

(Fidelity advertises Wealth Advisor Solutions, which offers specialized investment advice to wealth management clients, and a Portfolio Advisory Service, which the company describes as a professional money management account.)

Fidelity in 2023 abruptly halted a more than five-year practice of sending branch managers goals and performance metrics reflecting only Tier 3 after Maeker’s whistleblowing and firing, the lawsuit says.

Firing

The Financial Industry Regulatory Authority’s BrokerCheck database indicates Maeker worked at Fidelity from 1998 to 2022, when he was dismissed following allegations he “misrepresented interactions with clients and improperly used planning tools without confirming with clients the accuracy of the information he input into the tools. Such actions inflated employee’s performance metrics.”

Maeker denied Fidelity’s allegations to FINRA, calling them false, misleading and “intended to cause harm to my career.” 

In his 26 years as an advisor, Maeker wrote, he never received a customer complaint nor a negative comment on his FINRA forms, nor had he been put on probation or given warnings over his performance.

He told FINRA that Fidelity management’s action came shortly after he reported his branch manager’s “unethical business practices and Reg BI violations” to Fidelity’s chairman’s line, and said his manager and Fidelity took action against me after he made multiple written reports of these practices. .

Fidelity Responds

A Fidelity spokesperson told ThinkAdvisor by email Wednesday: “Fidelity denies all the allegations made by this former employee, including about his termination, and will defend itself vigorously. 

“Mr. Maeker’s complaint was already reviewed and dismissed by an OSHA investigator who concluded, among other things, that Mr. Maeker would have been removed from his role due to his misconduct regardless of his purported whistleblowing activity. In other words, Fidelity did not retaliate against him.”

Maeker’s lawyer, Rogge Dunn, told ThinkAdvisor via email that the lawsuit is proceeding  “de novo,” or anew and separate from past proceedings, in federal court. “The dismissal was an initial decision by only the investigator, not a ruling on the merits by OSHA,” he said.

“Maeker’s whistleblowing brings to light Fidelity’s investment practices which is of interest to people trusting Fidelity with their investments,” Dunn said.”Maeker was not the only financial advisor facing pressure to violate Reg BI, other FAs experienced the same pressure. I expect other financial advisors to come forward and blow the whistle on Fidelity.”

Dunn said his client “has paid the ultimate price for doing the right thing.”

‘Apoplectic’

Among the examples Maeker cites in his case, he alleges a client he serviced with $19 million in AUM closed his $9 million managed money account and gave Maeker instructions to transfer the $9 million into the client’s self-managed account. 

“The client’s $10 million self-managed account was outperforming Fidelity’s managed money account. The client said he did not want to pay Fidelity a $45,000 yearly fee anymore,” according to the suit.

Maeker’s manager and a regional director were upset with him for not persuading the client to keep his $9 million in the Tier 3 managed money account, telling him he shouldn’t have let the client move the funds and should get the investor to reverse the move, according to the suit.

A senior vice president in upper management “went apoplectic” over the client’s $9 million transfer to a self-managed account and told the two managers to grill Maeker over it and get the client to renege, according to the suit.

Dinah Wisenberg Brin

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