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Morgan Stanley Ran Hi-Pressure Sales Contest
Massachusetts’ top securities regulator accused Morgan Stanley of creating a conflict of interest and violating fiduciary rules by running a ‘sales contest’ calling for its brokers in Massachusetts and Rhode Island to promote securities-backed loans in which wealth-management clients borrowed against the value of their investment portfolios.
The program succeeded in tripling new loan originations, but it also created a conflict of interest between the brokers and their clients - according to prosecutors. Morgan Stanley supposedly played down the risks – e.g., telling clients the firm could liquidate their investments to repay the loans. The complaint comes amid a cross-selling scandal at Wells Fargo, where employees opened as many as 2 million unwanted accounts for unsuspecting customers.
“We object strongly to these allegations,” a Morgan Stanley spokesperson said. “The securities-based loan accounts were opened only after discussing the product with each client and obtaining their affirmative consent.” He added that clients don’t pay any fees to open the account, only when they draw down on the loan.
CEO James Gorman has made it a priority to lend more to wealthy individuals against stock they own as well as assets such as real estate and art collections. Loans in Morgan Stanley’s wealth-management arm hit a record $69 billion in the 2nd quarter. The firm also has rolled out new incentives to encourage clients to do more of their traditional banking, such as credit-card transactions and savings accounts, with the firm.
