Dan Solin April 25, 2017 Uncategorized A Culture of Greed and Deception I’m under no illusions about the lack of ethics in the securities industry. Almost every week, there are revelations of conduct so blatant you have to wonder how they get away with it. Here are some prime examples: High pressure sales contest Morgan Stanley is no more ethically challenged than other brokerage firms. Unfortunately, that’s a low bar. On April 7, 2017, it entered into a Consent Order with the Secretary of the Commonwealth of Massachusetts. It agreed to pay $1 million to resolve charges relating to a high-pressure sales contest for its financial advisors. The advisors allegedly persuaded customers to borrow against the value of the securities in their portfolios. The program (which clearly was not in the best interest of many clients) was known and encouraged by Regional Directors. The Consent Order states — in remarkably understated language — that Morgan Stanley’s conduct “failed to observe high standards of commercial honor and just and equitable principles of trade in the conduct of its business…” Here’s how I would have put it: Morgan Stanley violated its own internal rules and sacrificed the well-being of its clients at the altar of corporate greed. Sale of Mortgages The $1 million payment to the Commonwealth of Massachusetts was chump change compared to the announcement on February 22, 2017 of a $2.6 billion settlement over the sale of mortgage securities before the financial crisis. As reported in an article in The New York Times, Morgan Stanley purchased mortgages from subprime mortgage originators and packaged them into securities it sold to its clients. Many of these securities “ended up sustaining significant losses.” There was evidence strongly suggesting some Morgan Stanley executives were aware of the low quality of these loans. According to the New York Times, last year Morgan Stanley paid the Federal Housing Finance Agency $1.25 billion to resolve claims that it sold low quality mortgage securities to Fannie Mae and Freddie Mac. You have to wonder whether paying an aggregate of $4.1 billion will deter Morgan Stanley from similar conduct in the future. I’m not optimistic. Deception in 401(k) plans I recently reviewed the investment options in a 401(k) plan. I saw that one of the options was listed as “Vgrd Tgt Retr 2045 fund”. I assumed this was the Vanguard Target Date 2045 fund managed by Vanguard. Then I spotted something curious. The expense ratio (management fee) for this fund was 0.92%. The expense ratio for Vanguard’s fund is only 0.16%. I did some digging and here’s what I found. The fund in the plan wasn’t the Vanguard fund. It was a fund set up by the administrator to the plan. The only holding in the fund was the actual Vanguard Target Date 2045 fund! By engaging in this practice, the administrator was able to mark up the expense ratio from 0.16% to 0.92%. I suspect many participants thought they were buying the real Vanguard fund and made no further inquiry about the expense ratio. I was told by a firm that reviews many 401(k) plans that this is a fairly common practice. If so, it’s a particularly egregious example of ripping off plan participants to benefit “advisors” to the plan. A Culture of Greed and Deception blog was originally posted on The Huffington Post website. Dan Solin is a New York Times bestselling author of the Smartest series of books, including The Smartest Investment Book You’ll Ever Read, The Smartest Retirement Book You’ll Ever Read, The Smartest 401(k) Book You’ll Ever Readand his latest, The Smartest Sales Book You’ll Ever Read. He is a wealth advisor with Buckingham and Director of Investor Advocacy for The BAM ALLIANCE. The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services. Share: Facebook Twitter LinkedIn Email IIROC AdvisorReport
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