On the heels of Wells Fargo’s cross-selling scandal, the broker-dealer Morgan Stanley has been accused of inappropriately promoting “securities based loans” to customers, according to an article published in the Wall Street Journal on October 3, 2016. The complaint, filed by Massachusetts securities regulators, alleges that Morgan Stanley’s lax compliance and supervisory oversight led the broker-dealer to breach their own fiduciary duties owed to their wealth management customers by pushing the loans and minimizing the risks associated with the accounts.
If the allegations turn out to be true, the Massachusetts allegations would further exemplify the conflict of interest between broker-dealers pushing risky products on their clients without providing the balanced view of the products that industry rules require, which could be breaches of duties to certain of their customers. At the very least, FINRA Rule 2111 requires that broker-dealers ensure that recommendations of products are suitable for each customer, which requires a careful assessment of each customer’s respective investment objectives, risk tolerance, age, tax bracket, other investments, liquidity needs, as well as other factors.
But the emphasis appeared to be solely on generating income for the firm: Massachusetts securities regulators in the complaint pointed out that the firm’s compensation structure changed to emphasize the push toward securities based loans, and brokers were reimbursed to wine and dine customers and overcome the customer objection “I don’t borrow.”
This is one more glaring example of why a uniform fiduciary standard should be implemented for all brokerage firms who handle public customers’ money. The firm culture at Morgan Stanley, as alleged in the Massachusetts complaint, similar to other broker-dealers, emphasized hitting sales goals, not doing what was in the client’s best interest. This fiduciary standard, which was recently implemented by the Department of Labor for financial advisors who provide retirement advice would help to remove the conflicts inherent in an company where there is an emphasis on generating income for the firm and not listening to and serving the customer. If the fiduciary standard was in place, presumably, a wine and dine discussion would not happen in the first place, since brokers would never coach a customer to do something that’s not in their best interest and is only in the best interest of the broker and the firm.