The broker/dealer division of Morgan Stanley Wealth Management mislead clients about their accounts, particularly on fees they had to pay after third-party brokers executed trades on their behalf, according to charges filed by the Securities and Exchange Commission Tuesday. Without admitting or denying the findings, the firm agreed to a $5 million penalty to benefit harmed investors, as well as a censure and cease-and-desist.
Between October 2012 and June 2017, some Morgan Stanley Smith Barney clients with accounts in an asset-based ‘wrap fee’ program (in which they paid a singular asset-based fee for investment advice, brokerage services and trade execution) were under the impression that the firm was executing the majority of client trades, without any additional transaction-based charges, according to the SEC.
But this wasn’t always the case; the SEC claims the firm knew that some third-party sub-advisers (known as “wrap managers”) would direct most or all client trades towards third-party broker/dealers for execution, with clients paying additional fees without their knowledge. Melissa R. Hodgman, an associate director with the Commission’s Division of Enforcement, said advisors had a mandate to disclose all fees clients might have to pay.
“The SEC’s order finds that Morgan Stanley Smith Barney failed to provide certain clients in its retail wrap fee programs accurate information about the costs they incurred for the services they received,” she said.
Morgan Stanley Smith Barney was one of the largest sponsors of wrap fee programs in the United States during the period in question, according to the Commission. Brokers were directed to promote wrap fee programs as having “fee transparency,” with an asset-based fee that would rise and fall in brokerage accounts in correlation with the frequency of transactions, while remaining comparatively static in investment advisory accounts.
Sometimes, wrap managers would even direct trades towards broker/dealers that included transaction-based charges that Morgan Stanley Smith Barney was not aware of.
“We are pleased to have resolved this matter and have corrected these historical issues,” said a Morgan Stanley spokesperson in a statement.
