Morgan Stanley faces a lawsuit from the estate of a deceased client, alleging the firm breached its fiduciary duty by offering an interest rate as low as 0.01% on customers' uninvested cash within its default bank sweep program.
Morgan Stanley, like other wealth management firms, places clients' uninvested cash into its sweep program, which includes FDIC insurance. The program pays an annual percentage yield ranging from 0.01% to 0.5%, depending on the cash amount. For example, cash balances up to $500,000 earn just 0.01%.
Clients have the option to move their uninvested cash to higher-yielding alternatives such as money market funds and certificates of deposit.
The lawsuit, filed by the estate of Dr. Bernard J. Sherlip, a Connecticut physician, argues that Morgan Stanley should offer higher rates in its default program. Citing Regulation Best Interest, the suit asserts that Morgan Stanley is obligated to prioritize its customers' interests above its own, avoid conflicts of interest, and disclose any material conflicts.
Dr. Sherlip held multiple accounts at Morgan Stanley from November 2012 until August 2022. He passed away in March 2023, and his two daughters now serve as co-executors of his estate.
Morgan Stanley's spokeswoman declined to comment on the case.
The lawsuit, filed on June 16 in a federal court in Manhattan, highlights the increased awareness among investors regarding the interest rates on uninvested cash, especially in the past two years. This shift contrasts sharply with the low-interest environment that persisted for over a decade following the financial crisis.
Several brokerage firms and wealth management companies, including Vanguard, Interactive Brokers, and Wealthfront, have been promoting their higher interest rates to attract customers. Vanguard's Cash Plus Account, for example, currently offers a 4.6% interest rate and FDIC insurance up to $1.25 million for individual accounts and $2.5 million for joint accounts.
Higher interest rates have allowed banks to earn more by lending money than they pay on low-rate accounts like the sweep programs, boosting the net interest income of some wealth management firms. The lawsuit points out that Morgan Stanley earned over $8 billion in net interest income last year.
The lawsuit argues that while this growth has been lucrative for Morgan Stanley and its affiliates, it has been detrimental to its customers, violating the firm's fiduciary duties.
