Morgan Stanley Hit With $5 Million SEC Penalty Over ‘Wrap Fees’

Tuesday, 12/05/2020 | 17:20 GMT by Aziz Abdel-Qader

The bank systematically overbilled clients who were told to pay an asset-based “wrap fee” that covers all services.

Morgan Stanley Hit With $5 Million SEC Penalty Over ‘Wrap Fees’ — Bloomberg

Morgan Stanley’s wealth management business has been handed a $5 million fine by the US Securities and Exchange Commission for providing misleading information to clients of its ‘retail wrap fee’ programs.

The SEC said that Morgan Stanley Smith Barney, now known as Morgan Stanley Wealth Management, routinely directed wrap fee clients’ trades to third-party broker-dealers for Execution , which in some instances resulted in its asset-servicing clients paying additional transaction fees that were not visible to them.

The division, which has more than $2 trillion in assets under management (AUM), serves individuals, families, businesses and institutions.

The regulator issued an order filing and simultaneously settling charges against the New York-based company. Morgan Stanley neither admitted nor denied wrongdoing under the settlement.

According to the SEC’s cease-and-desist order, MSSB marketed its wrap fee accounts as offering clients a range of investment advice, trade execution, and other services within a “transparent” fee structure. However, it systematically overbilled clients who were told to pay an asset-based “wrap fee” that covers investment advice and brokerage services, including trade execution. The promotional materials gave the impression that wrap fee clients were not likely to incur additional trade execution costs. But in fact there were out-of-pocket expenses and higher ongoing fees as a result of these failures, the SEC states.

Morgan Stanley moves from its core origins

The order also creates a Fair Fund to distribute the penalty paid by MSSB to harmed investors. However, the seemingly large penalty doesn’t reflect exactly what the firm raked in from overcharges based on the SEC’s allegations

“Investment advisers are obligated to fully inform their clients about the fees that clients will pay in exchange for services. 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,” said Melissa R. Hodgman, Associate Director in the SEC’s Division of Enforcement.

Morgan Stanley is a global investment bank and wealth management firm, employing more than 60,000 people worldwide. The Wall Street giant makes money primarily from three main units: institutional securities, wealth management, and investment management.

The American lender has recently moved further from its core origins with an agreement to buy the discount brokerage firm E-Trade for about $13 billion, joining the battle for middle America’s wealth management market.

The addition of E-Trade would allow Morgan Stanley to tap into a new source of revenue through an additional 5.2 million customer accounts and $360 billion in assets.

The takeover would also give Morgan Stanley a significant share of the market for Online Trading and puts it on firmer footing with competitors like Bank of America and Wells Fargo.

The division, which has more than $2 trillion in assets under management (AUM), serves individuals, families, businesses and institutions.

The regulator issued an order filing and simultaneously settling charges against the New York-based company. Morgan Stanley neither admitted nor denied wrongdoing under the settlement.

Morgan Stanley moves from its core origins

The addition of E-Trade would allow Morgan Stanley to tap into a new source of revenue through an additional 5.2 million customer accounts and $360 billion in assets.

The takeover would also give Morgan Stanley a significant share of the market for Online Trading and puts it on firmer footing with competitors like Bank of America and Wells Fargo.