Morgan Stanley to Advisory Clients: Here’s What You’re Paying in Fees
Morgan Stanley billed clients with retail advisory accounts $28 billion from 2011 through 2015, a sum that would have plugged the U.S. government’s monthly budget gap last December, but only recently began telling clients individually the cost of their managed accounts.
The world’s biggest retail brokerage firm, as measured by its force of almost 16,000 advisors, last June sent clients “a communication containing [their] effective advisory fee rate with an instruction to contact the client’s financial advisor with any questions,” according to a letter sent in January to the Securities and Exchange Commission.
The company also has created a “Fee Accuracy Team” within its wealth management business to investigate billing errors and has “directed all financial advisors to report [advisory account] fee overbilling errors…that cannot be explained, may be system related, or if additional review is needed” to the team, according to the letter.
The correspondence with the SEC, coordinated by a lawyer from Sidley Austin, helped to preserve Morgan Stanley’s status as a “well-known seasoned issuer” that can file shelf offerings. That status was jeopardized by Morgan Stanley Smith Barney’s $13 million settlement in January in which it acknowledged overbilling managed account clients and custody reporting violations.
Following last year’s “communication” to clients as the settlement was being negotiated, Morgan Stanley will proceed with an annual notice spelling out fee rates, according to the letter.
A Morgan Stanley spokeswoman declined to comment on details of the new fee disclosure programs, including whether they will include administrative and other non-management fees, or how customers and advisors have responded to the initial round of disclosures.
The disclosure enhancements come as Morgan Stanley and its rivals have heavily promoted fee-based “managed accounts” of mutual funds and other pre-packaged products that are more stable and profitable than conventional commission-based transactional accounts.
Advisory accounts typically charge at least 1% of a client’s account assets.
At the end of 2016, 41% of client assets overseen by the average broker in North America were in fee-based accounts, up from 26% in 2011, according to PriceMetrix, a Toronto-based consultant to brokerage firms.
Morgan Stanley booked $2.2 billion of managed account fees in its wealth management division in the fourth quarter of 2016, compared with $774 million of commissions. The $28 billion of advisory fees that its clients paid between 2011 and 2015 was more than triple the $8.7 billion of compensation it paid brokers last year.
The brokerage industry’s shift to fees has been accelerated by the Department of Labor’s conflict-of-interest rule.
Although the Trump administration may alter or delay the rule that is scheduled to take effect on April 10, many firms have pushed brokers to move clients’ retirement investments from commission to fee-based accounts to avoid accusations of selling funds and other products that pay high commissions to brokers. Merrill Lynch, which has flatly prohibited commission-based retirement accounts, has also begun isolating fee charges (but not commissions) on clients’ monthly statements.
Several Morgan Stanley brokers contacted for this story from across the U.S. said they were unaware that clients would be receiving notices highlighting their fees or of the new fee-review team. The developments are likely more widely understood among the firm’s several hundred “consulting group” brokers who specialize in managed accounts, said the brokers, who were not authorized to speak and requested for anonymity.
Christine Jockle, the Morgan Stanley spokeswoman, declined to comment on responses of brokers and customers to the new policies.
“We have significantly enhanced our communications with clients regarding advisory fees, including providing them annually with an effective rate specific to their account,” she wrote in an email. “ In addition, we have strengthened our advisory fee monitoring and error resolution capabilities to identify and address issues if they arise.”