Lawsuit Spotlights Disclosure of Fees In Popular Asset Allocation

Yet another aspect of banks' brokerage programs is coming under legal scrutiny: the fees they charge for a popular new breed of account that helps customers diversify their investments.

Great Western Financial Corp. this week was hit with a lawsuit alleging that it failed to disclose fees and expenses adequately on one of its flagship brokerage products, the Sierra Asset Management account. The Chatsworth, Calif.-based thrift disputes the claims and says it is prepared to fight the case in court.

The suit, filed Wednesday in federal district court in Tampa, is the latest in a string of cases that fault banks for their investment product sales practices. Like the plaintiffs in these other cases, the Florida complainants contend that Great Western misled them about the risks involved when they bought mutual funds.

But they also take aim at an issue that has yet to be explored by previous plaintiffs - the fees charged for so-called asset allocation accounts.

"They're exorbitant," said Jonathan L. Alpert, partner in Alpert, Barker & Calcutt, the Tampa law firm representing the plaintiffs. "Here's another group of customers cheated by the folks they trusted."

Wildly popular among investors, asset-allocation accounts invest in a basket of mutual funds geared to a particular investment objective. For a fee, the mix of funds is shifted periodically as market conditions change.

The Florida plaintiffs allege that in offering its asset allocation account, Great Western engaged in "triple-dipping" of fees. The thrift's asset management product carries a mutual fund sales fee, periodic mutual fund management and administrative fees, and a 0.5% annual fee for asset allocation services.

"The loads and charges for the funds are at the very high end of reasonable," Mr. Alpert said. "And the 0.5% Sierra Asset Management fee isn't disclosed until after the purchase."

The Great Western lawsuit, filed on behalf of two Florida couples, seeks class certification for all Great Western bank customers who bought individual proprietary mutual funds or the company's asset allocation account between Jan. 1, 1992, and June 18, 1996.

It joins two brokerage suits already pending in California against the $44 billion-asset thrift.

The lawsuit strikes at the core of Great Western's mutual fund sales strategy, observers said. It also casts a pall over all banks' efforts to sell asset allocation or wrap products of their own.

"I clearly think you're going to see a round of criticism of fees from the media," said Geoffrey H. Bobroff, a mutual fund consultant based in East Greenwich, R.I.

Great Western has amassed $895 million in its asset management product, which invests in the thrift's proprietary Sierra Funds. About 25,000 customers have the accounts; most also have other relationships with Great Western.

However, unaffiliated broker-dealers are currently the largest source of new assets in the accounts, said Keith B. Pipes, chief financial officer for Great Western's mutual fund unit.

"Our fees are generally comparable to the industry as it relates to funds," Mr. Pipes said. "Up-front sales charges range from 3.5% for short- term bond funds up to 5.75% for our equity funds."

Fund expenses range from 0.6% to 1.7%. The asset allocation charge is 0.5% for Great Western banking customers and 0.65% a year to those who buy the product through an outside broker.

Still, lawyers expect the suit to have a negative impact on banks' asset allocation accounts.

If the plaintiffs are successful, "it would be very disruptive of this kind of product," said Jeffrey L. Steele, a mutual fund lawyer at Dechert Price & Rhoads, Washington. But even if they fail, the attention "suggests that providers of asset allocation programs ought to focus on the adequacy of their disclosure in the fee area."

By targeting the fee for asset allocation in a type of wrap account, this suit breaks new ground and raises questions for similar investment products.

"If the disclosure of that fee was omitted, it raises some heavy burdens under the federal securities laws," said Gerald E. Marcus, a lawyer with offices in Hamden, Conn., and Knoxville, Tenn. "It sounds like a good case for the plaintiffs."

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