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Morgan Stanley Advisor Gave Bad Advice, Lawsuit Claims

By Miriam Rozen May 28, 2019

A Morgan Stanley financial advisor gave a retired client bum tax advice about an inherited retirement account, according to a lawsuit filed this month against the wirehouse.

The advisor told the client, Carolyn Johnson, she could withdraw money from a retirement account she inherited from her father and replace the money within 60 days to avoid tax liabilities, the lawsuit alleges.

The advisor also told Johnson she had consulted with Morgan Stanley’s legal department about the proposed scenario prior to dispensing the advice, according to the lawsuit.

As it happened, the 60-day window that allows for withdrawing and then replacing money from qualified retirement accounts without incurring tax liabilities doesn’t apply to inherited accounts. So Johnson was hit with unexpected and significant tax bills after she took out the money to pay for construction on a home, she alleges.

“The amount of money was substantial for my client,” says Johnson’s lawyer, R. Terry Parker of Concord, N.H.’s Rath, Young and Pignatelli.

Morgan Stanley breached its fiduciary duties, misrepresented its services, and failed to train and supervise its employees, Johnson claims in her lawsuit.

Morgan Stanley representatives decline to comment about the pending lawsuit, according to a spokesperson. The firm has not yet filed a response to the lawsuit.

In her lawsuit, Johnson identifies herself as a client specifically of Morgan Stanley’s Graystone Consulting unit and also quotes its website’s marketing language to support her allegations of misrepresentation: “Your Graystone consultant will take a highly thoughtful and disciplined approach to help you manage complexity, optimize investment return potential and align your mission with your investment decisions,” the website states.

Parker, Johnson’s lawyer, says her client agreement was with Morgan Stanley but she was a client of Graystone. He does not know how Johnson qualified as a client of the Graystone unit since it typically offers services to foundations and family offices.

Initially, Johnson contacted her advisor about her concerns but did not get a response, Parker says. In reviewing her client agreements, he found references to arbitration clauses but no arbitration clause per se, which is the reason he filed her complaint in a federal court in New Hampshire, Parker says.

Advisors, as a rule, discourage clients from using the 60-day window for withdrawals from retirement accounts as a planning strategy.

(iStock Photos)

“If it goes sideways, it’s not pretty,” says Jon Robertson, an advisor at Abacus Planning Group in Columbia, S.C., an RIA managing $1 billion.

He doubts advisors on his team could make the kind of mistake that Johnson alleges her Morgan Stanley advisor did, creating her unexpected tax burden.

“We know enough about the rules of qualified retirement accounts and we know about our clients’ situation, so we can give them good advice. That’s how we add value,” Robertson says.

For advisors without a high level of knowledge about qualified accounts or their clients’ circumstances, Robertson recommends they refer any inquires to outside tax advisors.

What about conflating the rules for a client’s own retirement accounts and their inherited ones — as Johnson alleges her Morgan Stanley advisor did?

“I can’t imagine a scenario where you wouldn’t think of those as apples and oranges,” Robertson says.