Claim

Prior to 2012, my account at Morgan Stanley Private Wealth Management consisted of approximately 360k in equities that had been transferred to MS from a discount brokerage house. The account was not "managed" by MS and no fees were charged. The account had been funded and managed by my father as a gift to me.  I had very little prior investment experience.

At the end of 2012, due to the sale of real estate and the expiration of a 1031 account, the account grew to $$$$.  My intention was to reinvest a large portion of the money in real estate.  MS suggested that instead of using cash or a mortgage to purchase the real estate, they would invest the money in very safe AAA rated bonds which would return 5% or so and allow me to borrow up to 75% of the value of those investments, paying only 2.5% or so interest (adjustable rate with the option to lock-in), thereby capturing an additional 2.5% of income on my money less their fees and the bond fees.  I agreed after being assured that the investment would be very safe.


BOND FUND ERA- 2013
1. Bonds versus bond fund

I was first surprised by the execution of the purchase of bond funds as opposed to bonds.  I was not told and did not understand that bond funds were being purchased; that the underlying bonds were selected by a 3rd party fund, not by myself or my advisors. I was only told that I would be purchasing bonds.  The selection of the bond funds was never discussed.  The funds, quantities and comparative fees were selected by MS without consultation.	I was told only that some of the bonds would be in tax-free municipals and some in corporate.	

In early 2013, an uptick in the bond values on my portfolio caught me by surprise. If the bond values could go up by 70 or 100k, they could go down by that much.  I questioned it and was reminded that the increase was very small by percentage of the portfolio.  I told them that it was a lot of money by my standards, regardless of percentage.	


2. Bond Funds Went Down

In the spring of 2013, I started seeing a decline in the value of the portfolio.  I was still shopping for real estate.  I had drawn very little money from the Portfolio Loan Account (PLA).  I was concerned about the safety of the investment and my real estate purchasing financing. I was told by MS not to be concerned. They said that historically, there was very little movement in bonds. That we were in it for the long term. During the next 6 weeks or so, the value of the portfolio dropped significantly. I contacted MS again and asked them what was going on. I told them I was not a hero and I was very concerned.  Again I was told that we were in it for the long term, that this was a highly unusual event and that historically, whenever there was a drop in bond prices in a given year, it was more than made up for in the subsequent year.  I expressed my dissatisfaction.


3. Sell off loses bond fund fees

By fall of 2013, I had found some real estate for investment and to my surprise, I was told that my PLA availability was 65% not 75%.  There had been some recovery in the value of the bond holdings but not complete. Between the drop in availability, and the decline in the value of the account, I was going to be short on my real estate investments. It was then suggested by MS to convert my holdings to actual bonds which were "safer" and would provide me with more availability. I asked about the potential risk involving the possibility that the Federal Reserve would taper bond purchasing and thereby drive down the value of bonds. I was told by MS that the threat of taper in Spring 2013 had already caused the result to be "absorbed" and the threat was gone. I took their advice. I did not feel "safe" with bond funds anymore, and I needed the cash for real estate, so I agreed.  I purchased two properties in the last quarter of 2013 and financed the purchases completely out of the PLA which I was maxed out intentionally, deciding that real estate was better than investment. The bond funds were sold for cash in November, 2013.  All tolled, between fees and the drop in value of the bond funds, I had lost $180k. I should have made 5% on my investment.




BONDS Era- 2014

1. Takes 6 months to execute

By January, 2014 there had been no activity on the account in terms of reinvesting according to the financial plan that had been agreed; AAA rated municipal bonds related to NYC. I questioned MS and was told that the purchases were going to be made "soon";  that they could not be made all at once because the bond trade had to wait for the best values as they came along. I started seeing purchases appear on my account but it seemed slow.  By the end of February, only a fraction of the amount had been invested. I questione MS and was told that they were "almost done" and would be done in a short while. This purchasing continued.  Each time I questioned, more and more were purchased.  By July, 2014, the purchases were still not complete. It was at that time that my mother became disabled and required full time home care. I contacted MS and advised them. They suggested, and as custodian I declined, that in order to increase my availability on the PLA, that her account be used to additionally collateralize the PLA.  I advised them to discontinue purchasing bonds and to prepare to begin liquidating them as needed to provide me with cash to pay my mother's expenses.  I was never told that it would take 6 months to execute the reintvestment plan into NY bonds.  I was in fact told in February that they were "almost done". 


2. 2014 Draw down

By December, 2014, I needed 150k for expense and requested it from MS.  It was not available without partial liquidation.  I asked if I was okay on the investment and they said, "yes, you are fine." I intended to ask and they understood that I was asking if the underlying investment had lost money.

3. 2015 Reality check

After having looked at and studied many times, the MS statement, I realized that no where on the statement did it say whether overall, I had lost or made money and how much.  I pulled out my statement from January 2013 and with pencil and paper, accounting for draw downs, I was shocked to see that I had lost $140k.  Where did it go?  The investments seemed to have held their value?  I should have made 5% (bond yield) less 2.3% (interest on the PLA).

I requested all statements from MS online services and began to decipher and audit them. Frustrated in my attempts by the non-standard accounting of the statements, I requested from MS a complete accounting; a running balance of my account showing all debits and credits.  I received from them the same thing that was available online which was a "transaction report" which did not show a running balance that reconciled with the portfolio value.

1. Nowhere on any statement does it indicate whether you actually made money or lost money. For that you need a pencil and paper.

2. Nowhere on any statement does it break out the fees charged for investments.

3. The statement shows a "balance sheet" portion which defies standard accounting practices because it does not "balance", thereby hiding the "retained earnings" portion. 

After two weeks of calculating and studying, I finally created a spreadsheet that could reconcile account activity with their account balance, much as you would when you balance a bank account. 

I found out where my money went in 2014; fees hidden in the purchase price of the bonds.

LIQUIDATION ERA-2015

1. All fees lost

Within a few days or a couple weeks of requesting the running balance from MS, I received a call from them with advice as to a change in strategy. I was told that they had been meeting and discussing recent events with respect to Fed policy and felt that there was a significant possibility that interest rates would go up and that they were reacommending that my bond portfolio be liquidated, the PLA paid out and that we develop a financial plan that moved into equities.  I agreed immediately because I was absolutely stunned by the advice and knew at that moment that I was closing the account:

1. What happened to the "long term" argument that kept me from moving out of an investment that went bad?

2. What happened to the "fed taper" threat has already been absorbed that moved me into underlying bonds?

3. What happened to my option to "lock in" my interest rate?

4. Did I just sit out the biggest rally in equities in 25 years only to get in while everyone was saying that equities were headed down?

5. I paid significant fees to purchase these bonds which should have been amortized over many years of dividends but I had held them less than 1 year!!!

6. Was this sudden change in course somehow related to my online activity and my request for an accounting?

That very week that I asked myself all the above questions and agreed to the new plan and decided to close the account, I received a flyer from MS which proclaimed Steve Condos, my head advisor, One of the Top One Hundred Investment Advisors in the U.S. by Barrons. I was dazed and confused. How could that be? There was an asterick and I followed it to the footnote. The ratings were based on "fees generated for the firm".  I picked up the phone and closed my account.  All my questions were answered. My chief financial officer manipulated his client in pursuit of generating fees.  MS PWM told me they had "never lost a client".