Wall Street Pressures Brokers To Push Products

The Wells Fargo scandal exposed the unseemly practice of “cross selling” – or selling a different product or service to a current customer in an attempt to boost firm revenues. Wells Fargo pushed brokers and bankers to open up to eight new accounts per client to be eligible for bonus compensation.

This practice led to the firing of 5,300 Wells Fargo employees and criminal and regulatory investigations of the bank, tarnishing its once stellar reputation. The bank said it will pay $185 million to resolve claims that employees opened deposit and credit-card accounts without customers’ approval to satisfy sales goals and earn financial rewards. The cross-selling scandal also cost CEO John Stumpf his job.

Apparently, Wells Fargo is not the only firm to come under regulatory scrutiny for incenting their brokers to push products on customers.

According to news reports this month, the state of Massachusetts has charged Morgan Stanley Smith Barney with running an unethical, high-pressure sales contest among its brokers to encourage clients to borrow money against their brokerage accounts.

From January 2014 until April 2015, the firm ran two different contests involving 30 advisers in Massachusetts and Rhode Island. The goal was to persuade customers to take out loans against the value of the securities in their portfolios with the securities serving as collateral.

Advisers could earn $1,000 for 10 loans, $3,000 for 20 loans and $5,000 for 30 loans. The contest, which was closely monitored by Morgan Stanley management, generated $24 million in new loans, according to the Massachusetts complaint.  The contest was run despite an internal Morgan Stanley prohibition on such initiatives.

“The problem is that the financial advisers were rewarded for drumming up more business, not for doing what was right by clients,” noted Bloomberg columnist and former investment banker Matt Levine. “Attracting more assets, selling more products and charging more fees brings in more revenue for Morgan Stanley, and advisers get a cut of that. This is of course a conflict of interest: Getting paid to sell things to customers encourages you to sell things to customers, even if you don’t think, in your heart of hearts, that the customers need those things.”

At least one former Morgan Stanley adviser was less than thrilled with pitching the portfolio loan accounts to clients, noted Bruce Kelly, a columnist for industry trade paper InvestmentNews.

Morgan Stanley management “told us there was big money to be made by having our customers take out credit since the variable interest rate was profitable to the company and they could just sell out of the customers’ positions if the customer failed to make the payment,” according to the former adviser, as quoted in the complaint.  “They told us to call our customers to tell them that they could use the credit line to buy a house, pay for a home improvement project, buy a car and/or pay for school, etc.”

“They asked us regularly how many people we had put in these products, and used measurement tools to compare us amongst our peers,” the former Morgan Stanley adviser said. “I did not feel comfortable recommending every customer establish a credit line because I felt that my role as a financial adviser and fiduciary was to help customers save and make money and not go into bad debt.”

Massachusetts Secretary of the Commonwealth William Galvin said that Morgan Stanley advisers violated their fiduciary duty to their clients by recommending that they take on debt.

“This complaint lays bare the culture at Morgan Stanley that bred the high-pressure effort to cross-sell banking products to its brokerage customers without regard for the fiduciary duty owed to the investor,” Secretary Galvin stated. “This contest was relatively local, but the aggressive push to cross-sell was companywide.”

In the quest for additional revenue, many Wall Street firms have hurt their reputations and ultimately their bottom line. Count Wells Fargo and Morgan Stanley as the two latest examples of out of control cross-selling.

Zamansky LLC are investment and stock fraud attorneys representing investors in federal and state litigation and arbitration against financial institutions.