Morgan Stanley Sued Over Low Interest Rates on Client Cash

Morgan Stanley also violates Reg BI and contractual obligations by failing to make adequate disclosures to customers, elevate its customers’ interests above its own, avoid or at least disclose its conflicts of interest, disclose other viable options that may benefit customers, and demonstrate loyalty to customers, the lawsuit alleges.

As Sherlip’s investment advisor, the company owed him the highest fiduciary duty for personal and IRA accounts, and Reg BI compliance for other accounts, the complaint says. The suit, on behalf of the proposed class, alleges breach of fiduciary duty and unjust enrichment, and for those with IRAs, breach of contract.

For customer cash balances under $500,000, Morgan Stanley secures an interest rate of 0.01%, or one basis point, while paying its brokers 0.15%, or fifteen basis points, for that same customer cash balance. “In other words, the broker makes fifteen times more than the customer on that customer’s cash balance,” the suit says.

Unlike its brokers, Morgan Stanley does not pay its investment advisors directly for customer cash balances in the Morgan Stanley sweep program, the complaint contends. Morgan Stanley and its advisors charge a management fee on the cash balances. A typical annual advisory fee is approximately 1%, or 100 basis points.

“In this scenario, the investment advisor makes 100 times the amount of interest on the customer’s cash balances. Morgan Stanley has devised a scheme in which Morgan Stanley, its affiliated banks and its advisors make significant profits on advisory customer cash balances whereas the advisory customer, to whom a fiduciary duty is owed, literally loses money on his cash balances,” the lawsuit alleges.

The plaintiffs seek damages and restitution.

Morgan Stanley declined to comment on the lawsuit, a spokesperson said by email Monday.

Photo: Bloomberg