Wirehouse Morgan Stanley dropped the ball on paying premiums on behalf of a client’s $2 million life insurance policy, leading to the cancellation of the couple’s policy and laying to waste $400,000 in premiums the couple had previously paid, according to a lawsuit filed by their daughter. And advisors warn this is exactly what happens when you don't have proper safeguards for paying client bills.

“Somebody was asleep at the wheel,” says Fred Hagans of Houston’s Hagans Montgomery & Rustay, a lawyer who represents the daughter.

A Morgan Stanley spokesperson declines to comment on the lawsuit, which also names Lincoln National Life Insurance Co. and Voya Retirement Insurance and Annuity Co. as defendants.

"This policy is administered by Lincoln and their communications team would be best equipped to answer your questions related to the litigation," a Voya spokesman emailed in response to questions about the case.

A Lincoln spokesperson said the insurer would decline to comment about the litigation.

The lawsuit highlights potential pitfalls for all financial advisors who assume administrative responsibility for paying life insurance premiums for their clients. The likely downsides prompt some advisors to reject client requests to take on such tasks. Others agree to do so but implement administrative safeguards.

In 1998, Charles Hunt Montgomery of Houston established an investment account that would hold his and his wife’s survivorship life insurance policy for the benefit of their nine grandchildren, his daughter Kimberly Brill’s lawsuit states.

At the time, Montgomery was following the guidance of his advisors, then part of Salomon Smith Barney, which Morgan Stanley subsequently acquired in 2012, according to Brill’s lawsuit, which was filed in April in federal court in Houston.

Montgomery put the account in a trust and named Brill as its sole trustee.

“Morgan Stanley inexplicably refuses to accept any responsibility for the loss and injury...”
Fred Hagans for Kimberly Brill
Hagans Montgomery & Rustay

As the trustee, Brill was comfortable having Salomon Smith Barney serve as the investment advisor and investment account administrator for the account, given the long-time trust her father had placed in the wirehouse’s advisors, her lawsuit states.

By 2018, long after Morgan Stanley had acquired Salomon Smith Barney, Montgomery’s account had paid $400,000 in premiums for the life insurance policy, according to the lawsuit. That policy called for the insurers to pay $2 million to the Montgomery grandchildren after both husband and wife died, according to the lawsuit.

Morgan Stanley did not notify Brill about “any issues with the performance of the policy as the sole asset in the account,” or that any issues “affected” Morgan Stanley’s “ability to timely pay all premiums needed to keep the Policy in force and effect,” the lawsuit states. And as far as Brill knew, Morgan Stanley “appeared to be carrying out its duties to manage the account, to monitor the performance of the account’s sole asset (the policy), and to utilize the account to pay all premiums needed to keep the policy in force and effect,” the lawsuit states.

But in July 2018, Morgan Stanley sent Brill an interim quarterly account indicating that the policy’s cash value had dropped to zero, according to the lawsuit. Brill subsequently learned that Lincoln, Voya or both had made demands to increase the policy’s premiums and Morgan Stanley had responded by paying the increased premiums, thereby depleting the funds in the account at a faster rate than previously anticipated, according to the lawsuit.

It was in June 2018 — a month before Brill learned about the policy’s value equaling zero — that Voya determined the policy had “lapsed” for non-payment of premiums, according to the lawsuit.

Brill notified Lincoln of her willingness to pay all unpaid premiums but the insurer rejected that offer and said it would “never pay any benefit” to the policy’s beneficiaries, according to the lawsuit.

In her lawsuit, Brill lodges breach of contract claims against the insurance companies, and breach of fiduciary duties, negligence, negligent misrepresentation and fraudulent concealment claims against Morgan Stanley.

“Morgan Stanley inexplicably refuses to accept any responsibility for the loss and injury inflicted upon its client,” the lawsuit states.

Multiple Morgan Stanley clients have investment accounts set up to pay for life insurance policies, according to Brill’s lawyer Hagans.


“This was not a one-off,” he says of the family’s link between their investment account and life insurance policy.

Some advisors decline to assume such all-encompassing administrative responsibilities for funding life insurance policies.

Sheryl Rowling, the principal of Rowling & Associates in San Diego, which has more than $340 million under management, counts herself among those who just say no.

“Transfers outside the account only occur with a signed request by the client with voice confirmation for either one-time or automatic intervals,” Rowling says.

But other advisor teams do assume administrative responsibility for paying life insurance policy premiums from client accounts. At Abacus Planning Group in Columbia, S.C., an RIA managing $1 billion, the team assumes such responsibilities — but only with significant safeguards to prevent lapses in premium payments.

“We use checklists, to-do lists, processes and all of the above,” says Molly Thomas, a financial para-planner at Abacus.

“I have nightmares about it,” Thomas concedes.

To ensure those nightmares never become reality, Abacus structures its administration so that both clients and advisor teams receive notifications from insurance companies. It pays premiums far in advance of due dates, and it sets up automatic alerts of increases in premiums, Thomas and Jon Robertson, an Abacus advisor, note.

Abacus advisory teams also receive late payment notices from client life insurers — even if they are not responsible for ensuring the premiums get paid, says Robertson. They do so as a part of the RIA’s overall financial planning services, he says.