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Regulatory Sanctions

Morgan Stanley Pays $5Mn for Overcharging ‘Wrap Fee’ Clients

June 3, 2020

[Image: Morgan Stanley Signage in Times Square, NYC]



by Howard Haykin



When opening a bank or brokerage account, one of your first questions is … how much will it cost? At Morgan Stanley Smith Barney, many clients who opened retail wrap fee accounts were told one thing - just a single “wrap fee” each year - but then paid millions more in additional charges, without even knowing.



WHAT WENT WRONG.    Morgan Stanley for years had been a sponsor of wrap fee programs that provide a bundle of investment advisory and trade execution services to clients, all for a single asset-based “wrap fee.” And, while Morgan Stanley’s marketing materials and client agreements pointed out that extra charges could be imposed for things like brokerage commissions on trades not executed through Morgan Stanley, clients were told otherwise – that they would not incur additional expenses. EXCEPT THEY WERE. 


For nearly 5 years, many clients were charged millions in extra transaction-based charges. These charges arose because some wrap managers directed most, and sometimes all, client trades to third-party broker-dealers for execution (i.e., away from Morgan Stanley). And because the added transactional costs were embedded into the price of the securities, and not separately disclosed to clients, the charges were not visible to them.


Interestingly, Morgan Stanley knew whenever wrap managers executed trades away from the firm and how much those undisclosed transaction-based costs were. It's all there, in black and white, on Morgan Stanley's records of historical transactions for wrap fee clients.



Morgan Stanley agreed to pay a $5 million penalty to settle the SEC charges that it willfully violated Section 206(2) of the Advisors Act, which prohibits an investment adviser from engaging in any transaction, practice or course of business that operates as a fraud or deceit upon a client or prospective client - regardless of intent. The penalty will be distributed to harmed investors.



[For further details in this case, click on … SEC Press Release and SEC Order.]