Did Morgan Stanley Advisors Push Customers Into Unneeded Loans?

If we’ve learned anything from Wells Fargo’s recent fake account fiasco, it’s that high-pressure sales tactics can lead to unethical and sometimes illegal behavior. But did similar sales quotas and incentives lead Morgan Stanley employees to push customers into unneeded loans? That’s a question regulators in Massachusetts aim to answer. 

Massachusetts Secretary of the Commonwealth William Galvin on Monday accused a Morgan Stanley unit — operating in four branches in Massachusetts and one in Rhode Island — of forcing financial advisers into high-pressure sales contests to cross-sell loans backed by investment accounts.

According to an administrative complaint [PDF], in 2014 and 2015, Morgan Stanley emphasized the aggressive cross-selling of banking and lending products to wealth management clients.

In at least two instances, the culture inspired two sixteen-month sales contests in Massachusetts that rewarded bankers with $50 for each security-based loan application processed; $1,000 for 10 loans completed; $3,000 for 20 loans; and $5,00 for 30 loans.

“Morgan Stanley’s focus on cross-selling banking and lending products to its wealth management clients quickly paid dividends,” the complaint states.

The complaint claims that as part of emphasizing to boost its banking and lending business Morgan Stanley provided financial advisors with dozens of triggers… to use as catalysts to cross-sell PLAs (portfolio loan accounts), such as mortgage funding, tax liabilities or obligations, weddings, and graduations.”

“In addition, Morgan Stanley’s internal-use materials also offered suggestions on how to overcome client objections to borrowing against their portfolios, including one particularly alarming objection to overcome: ‘I don’t borrow,’” the filing states. “For clients to whom Morgan Stanley Financial Advisors owe a fiduciary duty, this is not an objection that should be overcome.”

Because of these incentives, Massachusetts claims that bankers who had a fiduciary duty to clients, “were not in the business of recommending that their clients burden themselves with debt.”

The program was discovered by Morgan Stanley’s Compliance and Risk department Dec. 2014, but no steps were taken to end the contest.

Instead, the state claims a second contest was created for the 2015 calendar year before finally being stopped later in the year. In the end, the complaint claims that advisors nearly tripled their banking and lending production with the contests, generating new loan blanks totaling $24 million.

“This complaint lays bare the culture at Morgan Stanley that bred the high-pressure effort to cross-sell banking products to its brokerage customers without regard for the fiduciary duty owed to the investor,” Galvin said in a statement to Bloomberg. “This contest was relatively local, but the aggressive push to cross-sell was company wide.”

A spokesperson for Morgan Stanley said the company objects to the allegations and will defend itself.

“The securities-based loan accounts were opened only after discussing the product with each client and obtaining their affirmative consent,” spokesman Jim Wiggins tells Bloomberg. “These accounts are valuable to clients providing access to low-cost liquidity whenever they choose to access it.”

The Secretary of Commonwealth’s administrative complaint is an internal legal proceeding that could allow state regulators to file charges seeking to prevent infractions of state laws and seek remedies for past violations.

[via Bloomberg]

Want more consumer news? Visit our parent organization, Consumer Reports, for the latest on scams, recalls, and other consumer issues.