Morgan Stanley Fined With $5M for Misleading Clients in Wrap Account Program

Morgan Stanley Fined $5M for Misleading Wrap Account Program

Morgan Stanley Smith Barney is paying $5M to clients harmed by misleading information presented through the firm’s retail wrap fee programs.

According to a Securities and Exchange Commission (SEC) order issued last week, Morgan Stanley promoted its wrap fee accounts as providing clients professional investment advice, trade execution, and other services within a “transparent” fee structure.

Misleading Wrap Fee Structure Resulted in Massive Fees 

Over the course of five years, and up until June 2017, many of the company’s client communications suggested that wrap fee clients were not likely to incur in additional trade execution costs.

But, during that period, authorities found that Morgan Stanley managers routinely directed wrap fee clients’ trades to third-party broker-dealers for execution. As a result, clients, in many instances, were obliged to pay additional transaction fees that were not as transparent as the firm suggested. 

Additionally, the SEC found that clients were incapable of assessing the value of the services received in exchange for the wrap fee they paid as a result of the firm’s actions. 

Advisors are Obligated to Clearly Explain Fees 

Melissa R. Hodgman, associate director in the SEC’s Division of Enforcement, explained that investment advisers are obligated to fully inform their clients about all fees associated with their services. 

Last week, a Morgan Stanley spokesperson affirmed that the wirehouse had resolved the matter and corrected all the historical issues associated with the program. 

However, expert attorneys say this could only be the beginning of a series of investigations for wrap fee accounts at brokerage firms. And, that this case should stand out as a warning to advisers selling those types of programs.

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