Special Report: Client Complaints Threaten to Tarnish American Express' Golden Name - TheStreet

With its vaunted brand and booming money management business,

American Express

(AXP) - Get Report

figures it's ready to be a prime-time Wall Street player. In fact, the credit card giant's financial-planning division wants to get four times as big in eight years by amassing $1 trillion in assets.

As it expands, however,

American Express Financial Advisors

, now with 2 million clients, finds itself under increasing scrutiny. While the company reports a high client-satisfaction rate, hundreds of disgruntled customers have lodged formal complaints against the firm in recent years for allegedly deceiving them, mishandling their money or dribbling their investments away in inferior company products.

In some of the cases, American Express paid sums of up to $35,000 to unhappy investors. Other complaints were dismissed, while more are pending in the courts and with the

National Association of Securities Dealers

. American Express defends its performance and denies extensive client disillusionment.

Jack Beverland's story stands above most. Five years ago, an NASD arbitration panel found the company liable when the retired Florida retailer alleged that American Express hired his brother-in-law, a former construction worker with shaky investment inexperience, to rope him into a series of investments with a promise of a 12% annual return.

The investments, mostly stock, quickly flopped. Beverland lost almost half of a $213,000 retirement nest egg.

"He was great at building houses but lousy at being a financial adviser," Beverland says of his brother-in-law, Tim Kirby.

Stories like Beverland's are a blow to American Express, which prides itself on probity and trust. In part because of its reputation, the parent company enjoys wide investor support. And business has been strong, notably in financial advice, driving the stock up 50% in the last year. It closed up 3.3% Tuesday at 159 1/8, valuing the company at around $70 billion.

The Minneapolis-based financial-advisers unit is American Express' fastest-growing division. It now contributes more than a third of corporate profit, behind travel-related services. Any flubs in running the division, the largest marketer of financial plans in the country, could cause serious financial setbacks for the company.

Shadows and Fog

Despite its size and roots, which trace back more than a century, American Express Financial Advisors has operated mostly in Wall Street's shadows. Through a network of more than 9,000 advisers, the unit sells computerized financial plans costing between $200 and $8,000 and mostly in-house, fee-based products, from mutual funds to insurance to estate plans.

Planning Power
In five years, profits have nearly doubled at American Express Financial Advisors

Figures in billions of dollars. Total profit in 1996 exclude charges and gains.
Source: Company reports

The unit doesn't operate like most Wall Street firms, which hire their own brokers to reel in clients. American Express advisers are mostly independent contractors. While trained by the company, the advisers are outsiders who pay a fee to the company in exchange for sales and marketing help, including access to American Express credit card holders. Card customers account for about one-third of all new clients.

While American Express defends its record of client service, the company has strident critics, many of whom wonder whether the company cares more about selling products than helping clients with their financial needs. About 100 lawsuits and NASD complaints alleging misconduct are filed each year against the firm, many raising questions whether the unit is acting responsibly.

Challenge to Funds

"It's still a sales-oriented operation instead of a financial-planning operation," says Robert McLeod, a financial planner who teaches finance at the

University of Alabama

. "They're using financial planning as a carrot to get people in to sell products. It's a question of loyalties to clients."

A key complaint of disillusioned clients is the poor performance of company products. Case in point: American Express' mutual funds, which hold nearly half of the $232 billon in assets under management at the company. By the company's own admission, the funds aren't doing well. They land largely in the bottom performance tier when stacked up against competitors, according to a

Morningstar

review for

TheStreet.com

.

"We have not been satisfied across the board with our mutual fund performance," says Tom Joyce, a spokesman for American Express Financial Advisors. "We need to get better."

But Joyce denies widespread client dissatisfaction with the firm. He says complaints are isolated. Typically, he says, the unit keeps 95% of its customers.

"About 85% of our clients say they're highly satisfied with their advisers," Joyce adds, citing an in-house survey.

Examining Motives

But Kenneth Robison, a Pittsburgh elevator engineer, claims in a 1996 lawsuit that he encountered an adviser so hungry for sales commissions that the broker sold Robison's mother, then in her 70s, 20 life insurance policies in a five-year period.

"He'd take my mother out to dinner and then we'd find out we had more insurance," Robison says. "It seemed to be making the company money, and that's fine, but I expected my interests to come first."

Robison says he filed papers to sue American Express but backed off when he discovered that a family attorney had reviewed the transactions. The attorney failed to question the sales, Robison says.

The adviser, David E. Martin, is no longer with American Express. He couldn't be reached for comment.

Joyce, the American Express spokesman, defends American Express' actions and says the policy sales were appropriate. He wouldn't discuss Martin's departure.

Adviser motives also are at issue in a 1998 case in which an Ohio couple's dealings with American Express apparently got the unsophisticated investors needlessly in trouble with the

IRS

.

According to a lawsuit filed by Wilma and Marcellus Truxal, adviser Sandra Haines engaged in a strategy of repeatedly buying American Express annuities for a tax-deferred IRA. Annuities, which typically carry substantial commissions, are themselves tax-deferred instruments normally held outside retirement accounts.

If not for an apparent blunder by Haines, the questionable strategy might never have been noticed. But Haines, in handling one transaction, filled out government paperwork incorrectly, triggering an incorrect IRS claim for taxes, the suit charges.

In the suit, which is pending, the Truxals are seeking $25,000 for any taxes they might owe and unspecified damages.

In an interview with

TheStreet.com

, Glenn Woody, a veteran fee-only financial planner in Costa Mesa, Calif., chided use of annuities in such arrangements. "From the overall point of view of the client, this makes my blood boil," he says. "It's a waste of tax deferral."

Haines, a 16-year American Express veteran, and American Express declined to comment on the suit. In court papers, the company has formally rejected the accusations.

Matter of Trust

Beverland, the Florida retiree, says he invested funds with American Express because his brother-in-law had joined the company and because American Express verbally guaranteed him a 12% annual gain with a series of investments.

But within three months, he says, the value of the investments had dropped to $102,000.

What's more, the company had left his account unattended, since Kirby had gone back to construction.

Beverland complained to NASD arbitrators in 1995, who found against the company and awarded him $35,000. He had asked for damages of $234,000.

"It was not near enough," he says of the award. "I learned a lot. You don't trust your brother and you don't trust American Express."

In its defense, American Express said it didn't give Beverland a guarantee but merely told him the return was a goal. Kirby couldn't be reached for comment.

American Express says it was satisfied with Kirby's qualifications.

'Waste of Time'

In interviews with

TheStreet.com

, a dozen other former clients, while mostly commending American Express for initiating them to investments, challenged the abilities of their advisers. Their criticism ranged from poor knowledge of retirement investing to incompatible recommendations and poor service.

Orna Samuelly, a San Francisco Bay area investor, described her experience with the company as a "waste of time," mostly because of inept advice and poorly performing mutual funds.

She says of her adviser, "I didn't feel like he really understood that much about what was going on in the markets. I remember one conversation where he wanted to put a lot of money in international funds and I started asking him about the impact of currency exchange and he really didn't understand the implications."

Responding to Samuelly's complaint and those of other former clients, Joyce defends the overall competency and experience of company advisers and says that American Express clients overwhelmingly get good advice and service.

"We happen to be very proud of the record we have in terms of complaints," he says.

Fund and Games

American Express can't say the same about its mutual funds. A recent Morningstar review showed that among the company's 14 largest funds, only two have been consistently strong when measured against their sector over periods of up to five years.

Only one fund,

New Dimensions A

, had a five-star Morningstar ranking recently. In comparison, another family of load funds,

American Century

, had four funds carrying five stars.

American Express says it is dealing with the problem in a number of ways, including refunding fees at least in part if a fund's performance lags. It is also bolstering in-house research and allowing clients to invest in more nonproprietary funds.

Justin Craib-Cox, a Morningstar analyst, attributes the funds' lackluster record to deeply rooted investment caution at the firm, and to the company's inability to cultivate strong fund managers.

"Everything has poked along like a second-hand car, not very fast and not with a lot of style," he says. "If you're risk-averse, that's fine. But if I was someone conscious about returns, I would be expecting more."

That applies particularly to a client drawn to technology stocks, Craib-Cox pointed out. Until recently, American Express did not have a fund that specialized in the past year's hottest market sector.

"That does tell you something indirectly about the quality of the organization," Craib-Cox says.