Morgan Stanley is the latest wealth management firm to find itself in the crosshairs of a lawsuit challenging the returns offered by its
A putative class action filed on June 14 in federal court in New York accuses Morgan Stanley of breaching its fiduciary duty to clients and of other violations in its practice of "sweeping" some of its clients' uninvested cash into low-yielding accounts at affiliated and external banks. Like many similar legal challenges to cash sweeps policies, the litigation argues the money would have produced better returns if it had been placed in higher-yielding money markets or similar vehicles and accuses Morgan Stanley of profiting unfairly through its management of customer money.
"This case concerns a simple ruse: in violation of its fiduciary duties and contractual obligations and a regulatory mandate to act only in the 'best interests' of its customers, Morgan Stanley (and its affiliates) fails to secure for its brokerage and advisory customers reasonable interest rates on its customers' cash balances," according to the suit, which was brought by law firm Williams Dirks Dameron on behalf of one individual's estate (more on that below).
A Morgan Stanley spokesperson declined to comment on the suit. Responding to a
Sweeping accusations
The term "cash sweeps" refers to brokerages' practice of taking clients' uninvested money held in brokerage and advisory accounts and moving it into internal and external banks. Those banks then pay interest in return for being able to use the cash as deposits that they can then lend out at higher rates.
Broker-dealers often justify their sweeps by arguing the policy provides clients with liquid assets held at banking institutions, where they enjoy the guarantee of the Federal Deposit Insurance Corp. But critics question the high profits that firms are able to make on the resulting interest rate spreads — the difference between what they pay on swept deposits and what they receive from loaning that money out.
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The lawsuit notes that the rise in interest rates seen over the past couple of years has allowed Morgan Stanley to drive up its returns on lent-out money. The firm reported roughly $8 billion in net interest income in 2023, a 9% increase from the previous year. An earning statement cited in the lawsuit attributed the rise primarily "to the net effect of higher interest rates, partially offset by changes in deposit mix."
The lawsuit states that Morgan Stanley's cash sweeps program — called its Bank Deposit Program — moves money over to two affiliated institutions, Morgan Stanley Bank and Morgan Stanley Private Bank, as well as an external bank, Citibank. The rate of interest the two Morgan Stanley affiliates pay on these deposits ranges from 0.01% to 0.5%, depending on the amount held in accounts, according to the suit.
Morgan Stanley's own
That fund was paying interest at a rate of 4.83% on March 18, according to the lawsuit. The suit also notes that other firms' sweeps programs offer far better returns than Morgan Stanley's. The Vanguard Group, for instance, pays 4.7% on swept cash up to nearly $2 million, and Fidelity Investments pays 2.67% no matter the amount, according to the suit.
But you can get 5% in a money market
Peter Crane, the president of
That's especially true since firms are continually going to greater lengths to let clients know they can opt out of sweeps programs.
"For most clients, you are only in cash temporarily," Crane said. "So even though the yield differential looks huge, it's the timing that's the more important factor. And, of course, investors are free to shift the money to another place. So I think investors have no one to blame but themselves."
Morgan Stanley's disclosure for its Bank Deposit Program does note that clients are under no obligation to take part in the cash sweeps. But the firm defaults to placing uninvested cash into it automatically.
Tim Welsh, the CEO of the
The difference in the yields offered by money markets and those in cash sweeps, he said, is big enough to "drive a truck through."
"This is a classic case of: If you do want to get the correct return, you have to take action," Welsh said. "It's just not very investor friendly."
It's not as though clients weren't told
Morgan Stanley's disclosure for its Bank Deposit Program reveals various conflicts of interest related to the firm's sweeps. Advisors, for instance, can receive a credit equal to as much as 0.15% of the average daily balance held in a sweeps account.
If the account holds less than $500,000 and pays out only 0.01%, "the broker makes 15 times more than the customer on that customer's cash balance," the lawsuit states.
By failing to choose higher-yielding options for uninvested cash, the lawsuit argues, Morgan Stanley advisors have failed to live up to their fiduciary duty to always put clients' interests first. The litigation likewise accuses brokers at the firm of similarly failing to live up to their responsibility under the Securities and Exchange Commission's Regulation Best Interest to always do what's best for their customers. And it alleges the firm fell short of its obligation to ensure clients were receiving a "reasonable rate" of interest on cash held in various types of retirement accounts.
Although technically a class action, the suit against Morgan Stanley lists only one plaintiff: the estate of Bernard J. Sherlip, a deceased physician who had lived in Fairfield, Connecticut. The co-executors of the estate are Sherlip's two daughters, who allege that Morgan Stanley mismanaged money Sherlip held in the firm's retirement, investors and advisory accounts between 2012 and 2022.
But the lawsuit, first reported by the industry publication Financial Advisor IQ, implies there could be many more people with similar grievances. It notes that Morgan Stanley provides "financial planning and advisory services to over 6.1 million client accounts through the work of over 16,000 financial advisors."
A partner at the firm Williams Dirks Dameron, which brought the class-action suit on the behalf of Sherlip's estate, declined to comment.
Other cases
Morgan Stanley is meanwhile defending itself in a
Firms' cash sweeps policies have also attracted the attention of regulators.
The SEC has also gone after other firms recently for alleged failures to properly disclose conflicts of interest in their sweeps practices. In September, for instance, it reached
