We've told you before that while some full-service brokers work hard to do right by their clients, many others are merely salespeople, pushing upon you whatever their firms want to sell. Here's a little reminder.
Morgan Stanley (NYSE:MWD) has just been dealt another blow by Massachusetts, which has filed a complaint seeking $5 million to $8 million from the financial services giant. The civil charge expands upon an earlier allegation that Morgan Stanley ran sales contests internally in order to spur sales of its in-house mutual funds. Brokers grouped in teams are reported to have competed against each other to generate the most sales and be rewarded for their achievements.
One little problem with this is that it violates state anti-fraud rules, because investors weren't informed that the broker had an extra incentive to recommend one investment over another. Investors who likely assumed that they were being offered an investment the broker thought would serve them well instead were sold an investment that would serve the broker well, earning him and his colleagues perhaps a pizza party or a trip somewhere.
Another little problem is that Morgan Stanley's funds haven't even fared very well. According to Morningstar data cited in a Wall Street Journalarticle (subscription required), "Morgan Stanley's in-house mutual funds have a mediocre track record. About 60% of the firm's funds have posted below-average returns for the three years ended June 30, and about 74% of its funds trailed the average portfolio in their class for the 12 months ended June 30."
The Journal also notes that the sales incentives in question appear to violate Morgan Stanley's own rules. Things certainly seem fishy, as some of the evidence gathered so far includes company emails in which employees are instructed to not put anything about the promotions in writing.
The upshot for investors? Unless you know your broker well and trust that he or she has your best interests at heart (and the smarts to earn you good money), you can always fall back on simple index funds, which have historically netted returns that roughly match those of the overall market -- and they probably beat most Morgan Stanley funds, to boot.
Learn more about some changes we'd like to see on Wall Street in our Motley Fool Manifesto.
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