Broker Accuses UBS of Skimming Fees on Separately Managed Accounts
A veteran broker has filed an arbitration claim against UBS Financial Services that alleges it kept a portion of wrap-account fees that he and his customers believed were being paid to outside portfolio managers.
The practices violated New York labor laws, California wage laws and ERISA laws related to withholding of retirement account compensation, it said.
The San Francisco-based broker is seeking more than $1 million in withheld compensation and $1 million in punitive damages, asserting legal theories that include misrepresentation, “conversion” of money owed to him in commissions and deferred comp, and breach of fiduciary duty.
A UBS spokesman did not respond to a request for comment on the filing. Rogge Dunn, the Texas-based lawyer representing de Castro, said that as of Monday the firm had not filed a response with Finra’s dispute resolution unit that he was aware of.
The complaint comes as regulators have been enacting and enforcing rules aimed at requiring more clarity to customers about managed-money fees. Most enforcement actions have involved sales of expensive classes of mutual funds, not the separately managed accounts (SMAs) for individuals that de Castro said are the subject of his complaint.
Dunn, who is working on a contingency basis, said he included “breach of fiduciary duty” as a cause of action against UBS because “advisors cannot properly advise clients if they don’t know where the fees are going.”
UBS kept 10-to-20 basis points of the 50-basis-point fee that its brokers believed were designated for external managers, failing to tell them it had negotiated lower rates, the complaint said. More than two-thirds of de Castro’s fee-based accounts are in SMAs, he said in an interview.
He discovered UBS’ fee grab in mid-2017 when it suddenly changed its policy and began crediting him with at least $30,000 a month more in monthly production than he received in his previous eight-and-a-half years with the firm, according to the claim. UBS refused to provide an accounting of commissions that he should have received or explain the reason for increase in his income after July 2017, it said.
A complex director told de Castro that if he was upset about clients paying too much, he should rebate them some of the fees, de Castro said in the interview.
“I don’t need the perfect settlement,” said de Castro, asserting that he was the second largest producer in UBS’s San Francisco office, producing $2.6 million of revenue when he left in May 2018. “I just want people to know the firms shouldn’t be doing things like this.”
Most of his accounts are fee-based rather than commission, and more than two-thirds of his fee-based revenue comes from accounts managed by third parties, said de Castro, who began his brokerage career in 1987 at Smith Barney.
Dunn said he is not aware of other legal actions involving failure to credit brokers for hidden revenue firms accumulate by negotiating lower-than-disclosed manager fees. De Castro’s complaint also says UBS illegally required him to pay some of his sales assistant’s compensation, but the broker said he is not strongly committed to that argument made at his lawyer’s suggestion.
A top-quintile broker at another wirehouse who prolifically used separately managed accounts for his wealthy clients said that after years of complaints about the firm’s pocketing part of the fee, he wrestled some recompense. The now-retired adviser, who spoke on condition of anonymity, said he considered a lawsuit but backed off because of the expense and energy it would have required.
The 50-basis-point management fee cited in the UBS lawsuit is at the high end of the range that large firms pay to equity managers who have trading discretion over individual client accounts, said Tom O’Shea, a research director at asset management consulting firm Cerulli Associates.
Fees paid on plain-vanilla, large-cap equity managed accounts that use model-delivered signals ranged in 2018 from 28 to 40 basis points, according to Cerulli data. Separately managed accounts in which customers sign contracts with a firm as well as with an outside manager who has expertise specialized or exotic equity investment styles carried an average management fee of 49 basis points.
O’Shea said he was not familiar with concessions that firms may negotiate with outside managers, nor with how fees are allocated among firms, brokers and/or customers.