On Advice

Morgan Stanley sales contests among advisers didn't help clients

The contests were run despite an internal Morgan Stanley prohibition on such initiatives

Oct 11, 2016 @ 10:39 am

By Bruce Kelly

Everyone's a winner at Morgan Stanley when the largest retail brokerage in the United States starts a contest to boost lending products, including “portfolio loan accounts,” known as PLAs at the firm.

Everyone but the client, that is.

The brokerage firm's hard sell stands out in a complaint filed last Monday by the Massachusetts Securities Division against Morgan Stanley.

Massachusetts charged the wirehouse with conducting an unethical, high-pressure sales contest among its financial advisers to encourage clients to borrow money against their brokerage accounts. The contest was run despite an internal Morgan Stanley prohibition on such initiatives.

From January 2014 to April 2015, the firm ran two different contests involving 30 advisers in Massachusetts and Rhode Island. The goal was to persuade customers to take out securities-based loans — PLAs — in which they borrowed against the value of their portfolios, with the securities serving as collateral.

There's nary a mention of Morgan Stanley clients in the complaint, which is chock-full of quotes from adviser emails that underscore the aggressive sales and performance culture at the brokerage firm.

“Have I or my (administrative assistant) won anything,” asked one adviser in an email. “We have done a ton of [PLAs].”

“Game on,” proclaimed another adviser.

Advisers could earn $1,000 for 10 loans, $3,000 for 20 loans and $5,000 for 30 loans. The contest, which was closely monitored by Morgan Stanley management, generated $24 million in new loans, according to the complaint.

(Related read: Former Morgan Stanley broker barred for unauthorized borrowing from clients)

Advisers were not paid in cash but given money for “business development allowances,” or BDAs, which are essentially Morgan Stanley bucks for schmoozing clients.

“Does the bonus stop at 30 PLAs?” wrote another adviser. “What if we do 60?? Does that double the bonus to our team??? You know how we are about BDA money!!!”


In the first quarter of 2015, the firm's management cited rival Merrill Lynch, which was already offering express lines of credit, as part of the pressure to keep up, according to the complaint.

But one former Morgan Stanley adviser was less than thrilled with pitching the portfolio loan accounts to clients.

(Related read: Merrill Lynch eliminates commission IRA business in response to DOL fiduciary rule)

Morgan Stanley management “told us there was big money to be made by having our customers take out credit since the variable interest rate was profitable to the company and they could just sell out of the customers' positions if the customer failed to make the payment,” according to the former adviser, as quoted in the complaint. “They told us to call our customers to tell them that they could use the credit line to buy a house, pay for a home improvement project, buy a car and/or pay for school, etc.”

“They asked us regularly how many people we had put in these products, and used measurement tools to compare us amongst our peers,” the former Morgan Stanley adviser said. “I did not feel comfortable recommending every customer establish a credit line because I felt that my role as a financial adviser and fiduciary was to help customers save and make money and not go into bad debt.”


Cross-selling at the large banks has been big news of late. Last month, Wells Fargo & Co. was fined $185 million for opening checking and credit card accounts that customers never approved or knew about.

Morgan Stanley shrugged off the charges from the Massachusetts Securities Division.

“Nothing was 'sold' to clients. There is no cost to open a securities-based loan account, to which all clients gave affirmative consent,” company spokesman Jim Wiggins wrote in an email to InvestmentNews. “They incurred no charges unless they affirmatively chose to borrow money. Clients received extensive risk disclosures, and the Massachusetts lawsuit cites no evidence that any client was harmed, nor does it cite any client complaint.

(Related read: Wells Fargo mulls development of immediate variable annuity)

“The fact is: Clients like this account because it offers low-cost liquidity whenever they chose to access it, has very flexible repayment terms, and they do not have to disrupt a long-term investment strategy,” Mr. Wiggins wrote.

In part, Morgan Stanley is right. Clients borrowing cash against securities is a fundamental part of the brokerage industry. Why sell $50,000 worth of stock during a bull market to pay for your daughter's wedding when you can borrow the money from Morgan Stanley or Merrill Lynch, use securities as collateral and lock in a low interest rate on the loan?


But Mr. Wiggins' statement ignores the fact that local sales contests are simply against Morgan Stanley's corporate rules. According to the Massachusetts complaint, the sales contests in New England inspired other Morgan Stanley branches to attempt the same, even after being told by compliance executives that such contests were verboten.

Browbeaten Morgan Stanley compliance officers received pushback when they told bankers they couldn't approve of the sales contests, according to the complaint. “I called and said no,” according to one compliance executive email cited in the complaint. “It is a contest, but they are saying others are doing it and it is not a contest [because] everyone is a winner.”

Morgan Stanley, remember this: In the age of the fiduciary adviser, the client is supposed to be the winner.


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