Morgan Stanley Unit Accused of High-Pressure Sales Tactics

  • State says advisers pushed into contests to cross-sell loans
  • Massachusetts official accuses company of ‘unethical conduct’

A Morgan Stanley unit allegedly set up a high-pressure contest to spur financial advisers to cross-sell loans backed by investment accounts in an effort to boost banking and lending business and gain ground on rivals, the Massachusetts securities regulator said in a complaint against the company.

The accusation against Morgan Stanley Smith Barney LLC, the New York-based bank’s retail brokerage, increases the scrutiny on an industry tactic that has recently backfired for others including Wells Fargo & Co. The San Francisco-based bank agreed last month to pay $185 million after federal and local authorities found its cross-selling culture helped push employees to open unauthorized accounts.

In the administrative complaint filed Monday, Massachusetts Secretary of the Commonwealth William Galvin accused the Morgan Stanley unit of “dishonest and unethical conduct” within the state and Rhode Island. The unit allegedly used a contest to push securities-based loans on customers from January 2014 to April 2015.

“This complaint lays bare the culture at Morgan Stanley that bred the high-pressure effort to cross-sell banking products to its brokerage customers without regard for the fiduciary duty owed to the investor,” Galvin said in a statement. “This contest was relatively local, but the aggressive push to cross-sell was company wide.”

Sales Culture

The firm’s sales culture attracted scrutiny as authorities blamed Wells Fargo’s cross-selling goals for encouraging employees to open potentially more than 2 million accounts without customers’ knowledge. Wells Fargo Chief Executive Officer John Stumpf was summoned to Washington for two Congressional hearings, on Sept. 20 and Sept. 29, to explain the practices.

Jim Wiggins, a Morgan Stanley spokesman, said the company objects to the allegations and intends to defend itself “vigorously.” Clients aren’t charged fees to open a securities-based loan account and are charged only if they choose to borrow money, Wiggins said in an e-mailed statement.

“The securities-based loan accounts were opened only after discussing the product with each client and obtaining their affirmative consent,” Wiggins said. “These accounts are valuable to clients providing access to low-cost liquidity whenever they choose to access it.”

Participants were rewarded with incentives from $1,000 for 10 loans to $5,000 for 30 loans, and their performance was closely tracked, Galvin said in the statement. The contest helped triple the number of securities-based loans from the year before the contest started and generated almost $24 million in new balances.

Downplaying Risk

Morgan Stanley’s compliance-and-risk office discovered the program in December 2014, but didn’t shut down the contest until the following April. It denied the program’s existence to the public while internally downplaying the risk, Galvin said. The New York Post reported in July that Galvin had launched an investigation into the practice.

An administrative complaint is an internal legal proceeding that allows Massachusetts regulators to file charges seeking to prevent infractions of state laws and seek remedies for past violations.

The incentives came in the form of additional “business-development allowances,” payments that financial advisers used to “wine and dine” clients with drinks, meals and gifts such as tickets to Boston Celtics games, according to the complaint.

Galvin alleged Morgan Stanley began focusing on wealth management in the wake of the financial crisis and pushed banking products such as securities-based loan accounts to gain ground on its competitors.

Revenue from global wealth management rose to $15.1 billion in the fiscal year ending in December 2015, from $12.6 billion in the same period in 2010. The retail brokerage division jumped in size when the company completed the purchase of Smith Barney from Citigroup Inc. in 2013.

Client Catalysts

Morgan Stanley encouraged advisers to pitch securities-based loans when clients mentioned certain "catalysts" such as weddings, graduations or tax liabilities, according to the complaint. One former adviser told regulators the loans were being pushed to keep up with Bank of America Corp.’s Merrill Lynch unit, which was offering express credit lines, according to the complaint.

The former adviser said Morgan Stanley promoted the idea that there was “big money to be made” by having customers take out credit since the variable-interest rate was profitable. If they failed to make payments, the firm could sell out of customers’ positions, according to the complaint.

Galvin alleges that advisers were encouraged to push clients to open credit lines even if they didn’t intend to use them, with an internal document quoting the famous line from the movie “Field of Dreams” - “If you build it, they will come” - to illustrate the fact that customers were more likely to use the accounts the longer they stayed open.

Morgan Stanley slid 0.3 percent to $31.97 at 4 p.m. in New York, compared with the 0.4 percent decline for the 64-company S&P 500 Financials Index. Wells Fargo shares fell 1 percent, extending its drop for this year to 19 percent, the worst performance in the index.

The case is In the matter of Morgan Stanley Smith Barney LLC, E-2016-0055, Commonwealth of Massachusetts, Office of the Commonwealth, Securities Division (Boston).

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