(Bloomberg View) -- Morgan Stanley is in trouble in Massachusetts for allegedly running a sales contest for some of its financial advisers in which the advisers could win valuable prizes by convincing clients to borrow against their brokerage accounts.

Except that the prize money could only be spent on entertaining more clients: Rather than respond to the needs of their clients, financial advisers began to push PLAs in order to win the BDA incentives awarded under the sales contest. Financial advisors used the BDA money awarded to them to wine and dine clients, including the following items: Boston Celtics tickets, client drinks, one client meal in the amount of $653.40, and $1,000.00 in client gifts from one financial adviser.

(Bloomberg News)
(Bloomberg News)

Read more: Morgan Stanley charged with unethical sales practices by state regulators

Right away, we have come to an insurmountable imaginative divide between me and these financial advisers.

These people thought that this was good. They wanted more money to entertain clients. "You know how we are about BDA money!!!," said one of them, with three exclamation points, so you know how he was about it. (He was in favor of it. "BDA" stands for "business development allowance," i.e., client-entertainment money; "PLA" stands for "Portfolio Loan Account.") Now, for myself, I can imagine few crueler punishments than being told to go spend a thousand bucks on taking clients out to dinner and a Celtics game, but that is one of many reasons that I'm not a retail financial adviser.

Anyway, the Morgan Stanley advisers seem to have done their best to sell lending products and earn client-entertainment allowances, out of all proportion to their economic value, so this program was a success for Morgan Stanley, albeit on a small scale (because it was run only in five offices in Massachusetts and Rhode Island). But the Massachusetts Securities Division didn't like it, and has brought an administrative complaint against Morgan Stanley. A Morgan Stanley spokesman said the wirehouse objects to the allegations and intends to defend itself "vigorously."

"Sensitive readers may want to avert their eyes at this point, because we are going to get into some hard truths. Financial advisers are paid for bringing in business," writes Levine.

As you'd expect, the written communications turned up by the MSD are a little embarrassing, but not in the usual way of financial scandals, where traders send each other ungrammatical chat messages joking about going to prison. The e-mails here are embarrassing only for their earnest embrace of sales clichés. "There is no reason we shouldn't be able to knock this out of the park," said a private banker to a financial adviser. Another private banker wanted to "ensure we are giving [financial advisers] every opportunity to move the needle." "Game on," said one financial adviser. "Let's try and finish the year strong!," said another, with what I can only assume was genuine if incomprehensible enthusiasm.

None of this suggests that the financial advisers thought they were doing anything wrong. Which is understandable. It's not even clear what the Massachusetts Securities Division thinks they were doing wrong. There's no actual law against sales contests. The complaint was brought under very generic statutory language allowing the state to punish investment advisers who have "engaged in any unethical or dishonest conduct or practices in the securities, commodities or insurance business." The complaint just assumes that the sales contest was "unethical or dishonest," because it caused financial advisers to be "focused on their banking and lending numbers, not on the needs of Morgan Stanley clients," and because "the incentives paid under the sales contest created a material conflict of interest for participating financial advisers." The problem is that the financial advisers were rewarded for drumming up more business, not for doing what was right by clients.

Cross-selling has become a dirty word in banking, but everyone shrugs resignedly when car salesmen push the extended warranty.

As Massachusetts Secretary of the Commonwealth William Galvin put it: “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," Galvin said in a statement. "This contest was relatively local, but the aggressive push to cross-sell was company wide."

Sensitive readers may want to avert their eyes at this point, because we are going to get into some hard truths. Financial advisers are paid for bringing in business. That is obviously, always and everywhere true. Yes these particular financial advisers got some extra client dinners for bringing in a particular kind of business, but that was against a background where their paycheck was generally based on bringing in business. There was no particular secret about it. "Advisers are paid on the basis of fees and commissions they bring in each year, with higher producers keeping a higher percentage of revenue," reported the Wall Street Journal, in an article about Morgan Stanley's published tables of how much advisers would get paid for bringing in business. 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. But I will tell you another hard truth, which is: Everyone is paid for bringing in business. This is true of fiduciaries: Many lawyers bill by the hour, so they have financial incentives to bill more work to their clients. It is true of non-fiduciaries: Car salespeople get paid for selling cars, so they have financial incentives to push customers to buy cars. The way business works, in the most general possible way, is that you do business, and people pay you for doing the business, and you try to do more business, so more people will pay you more for doing the business.

It is weird to be shocked by this. The Massachusetts Securities Division objects that this sales contest was a "high-pressure effort to cross-sell banking products." Coming just a few weeks after Wells Fargo's fake-accounts debacle, where employees reacted to high-pressure cross-selling demands by fraudulently creating millions of fake accounts, you can see how this would be a concern.

Except that there's no evidence that Morgan Stanley's contest was actually high-pressure, certainly not compared to the apparent constant misery at Wells Fargo. No one at Morgan Stanley seems to have been fired, or threatened with firing, for not opening enough portfolio loan accounts. Instead, if they opened enough accounts, they got a small prize -- more client dinners -- that I would have thrown away as fast as you could give it to me, though I guess they were into it.

But the MSD's main objection seems to be just that it doesn't like the whole unseemly business of selling products to customers who might not want them. For instance: Morgan Stanley's internal-use materials recommended that financial advisers look for specific triggers as catalysts to offer clients securities-based lending products.

These triggers included bridge loans for mortgage funding, tax liabilities or obligations, weddings, graduations, etc., and frivolous spending in the form of purchasing a luxury item like a car or yacht. Some more hard truths: Sometimes people buy cars. Sometimes people borrow money to buy cars. Sometimes car salespeople encourage people to buy cars, and to
borrow money to do so.

There is a widespread belief that the financial industry is the most unethical business around, that it is a cesspool of abuse and corruption, that "the business model of Wall Street is fraud." And, you know, sure. But it is strange to see how often Wall Street is unthinkingly held to a higher standard than other businesses. The conduct for which Jesse Litvak was prosecuted -- essentially, telling customers that he was barely making any money on the bond trades he did with them, when he was in fact making a lot of money -- would be unremarkable for a car salesman.

Cross-selling has become a dirty word in banking, but everyone shrugs resignedly when car salesmen push the extended warranty. And here, the Massachusetts Securities Division seems to be claiming that it is illegal for Morgan Stanley to reward salespeople for making sales, and criticizes Morgan Stanley for suggesting that its customers spend their money on something as frivolous as a car. Imagine bringing a similar case against a BMW dealership.

What is going on?

One basic issue is that people think that financial advisers should be advisers. To be fair, it is right there in the name. "Adviser" has a different connotation from "salesperson": Advisers just sound like they should be honest, disinterested fiduciaries for their clients. They're not supposed to win a set of steak knives for signing up more clients for loans. The industry hasn't always helped itself here, particularly in retail financial advice, where some advisers are fiduciaries, some aren't, and some sometimes are and sometimes aren't.

"When handling a brokerage account," says Morgan Stanley to its customers, "your financial adviser must have a reasonable basis for believing that any recommendation is suitable for you, but will not have a fiduciary or investment advisory relationship with you." The financial adviser advising you on investments doesn't have an investment advisory relationship with you. It is a bit confusing!

If you expect financial advisers to be fiduciaries, or quasi-fiduciaries, then you will hold them to a higher standard than most salespeople. Of course fiduciaries too are ultimately paid more for doing more business, but in a genteel sort of way. There are no contests. There are no crass e-mails about moving the needle or knocking it out of the park. They are transparent about how they get paid, and how much. They just do what is best for their clients, and the money comes to them as an afterthought, and they avert their eyes from it in embarrassment. They are not, of course, in the business of money management for the money.

The problem isn't limited to retail financial advisers. We talked last week about a Goldman Sachs derivatives salesman who seduced the Libyan Investment Authority into doing some ill-advised trades with Goldman. The Libyans sued claiming "undue influence": They trusted him, is the essence of their complaint, and he turned out to be just another salesman. There was no fiduciary duty, exactly, and he never lied to them, but finance is complicated, and if you can't trust the guy selling you complex derivatives to sell you the right complex derivatives, then whom can you trust?

One broad story you could tell about post-crisis financial regulation is that banks believe deeply in the arms-length-counterparty, caveat-emptor sales model -- and no one else does. The things that constrain salespeople in other businesses don't work as well in finance: The stuff that banks sell is hard to understand, comparison-shopping is difficult, and reputational concerns don't seem to matter when everyone's reputation is terrible.

Too many people at banks look to the outside world like they should be trusted advisers to clients, but think of themselves as salespeople to counterparties, and are paid and promoted and praised for selling products. Eventually that gap between perception and reality has to close, one way or another.

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