Dina Weisenberg Brin
June 24, 2024 2:59 PM
The wirehouse's payments were a fraction of what Vanguard and other firms paid to similar accounts, according to the complaint.
According to the proposed class action lawsuit, Morgan Stanley breached its duty to act in its clients' best interests by paying unfairly low interest rates to brokerage and advisory clients on their cash sweep program balances.
“This case is about a simple scheme: Morgan Stanley violated its fiduciary and contractual duties, as well as its regulatory obligations to act solely in its clients' 'best interests,' by failing to secure reasonable interest rates for its brokerage and advisory clients on their cash balances,” the complaint alleges.
According to a lawsuit filed earlier this month in the U.S. District Court for the Southern District of New York, the financial services company's net interest income — the difference between what it secures from clients and what it earns in the market — has increased dramatically since March 2022 in the rising interest rate environment.
The lawsuit, filed by the estate of the late Bernard Shelip, a Connecticut doctor who died last year, says the growth has been “highly profitable” for Morgan Stanley and its affiliates, which are expected to generate more than $8 billion in net interest income in 2023 alone, but that the plan is “highly harmful to clients,” who may be able to get higher interest rates elsewhere.
“The interest rates offered by Morgan Stanley through its Bank Deposit Program (BDP), which is essentially a Morgan Stanley account sweep program, are significantly lower than the sweep programs of other brokerages and advisory firms,” states the complaint, which seeks a jury trial.
The complaint includes a chart alleging that Morgan Stanley's cash sweep program pays between 0.01% and 0.50% interest depending on cash balances, while Vanguard pays 4.7% or 2% depending on balances, and Fidelity pays 2.69%.
“Accordingly, other brokerage and advisory firms using sweep programs paid or secured significantly higher interest rates than Morgan Stanley,” the complaint alleges.
The lawsuit alleges that the company violated its fiduciary duties, its contracts with clients and the Securities and Exchange Commission's best interest regulations by failing to secure reasonable interest rates for its clients.
The lawsuit alleges that Morgan Stanley failed to provide adequate disclosures to clients, failed to put its clients' interests above its own, failed to avoid or at least disclose conflicts of interest, failed to disclose viable alternatives that could benefit clients, failed to demonstrate loyalty to clients, and violated Regulation BI and contractual obligations.
According to the complaint, as Mr. Shelip's investment advisor, the firm owed the highest level of fiduciary duties with respect to his personal and IRA accounts and complied with Reg BI with respect to his other accounts. The lawsuit alleges breach of fiduciary duty and unjust enrichment on behalf of the proposed class, and breach of contract with respect to the IRA holders.
Morgan Stanley reserved 0.01% (1 basis point) interest on clients' cash balances below $500,000 and paid brokers 0.15% (15 basis points) on those same client cash balances. “In other words, the brokers made 15 times as much money on the clients' cash balances as the clients did,” the complaint states.
The complaint alleges that unlike brokers, Morgan Stanley does not pay investment advisers directly for clients' cash balances in the Morgan Stanley Sweep program. Morgan Stanley and its advisers charge management fees on the cash balances. A typical annual advisory fee is about 1 percent, or 100 basis points.
“In this scenario, the investment advisors earned 100 times interest on their clients' cash balances. Morgan Stanley devised a scheme whereby Morgan Stanley, its affiliated banks and the advisors made significant profits from their advised clients' cash balances while their fiduciary-duty advised clients literally lost money on those cash balances,” the complaint alleges.
The plaintiffs are seeking damages and compensation.
A Morgan Stanley spokesman said in an email Monday that the bank declined to comment on the litigation.
Photo: Bloomberg