Suit: UBS' sweeps change is 'implicit admission' of wrongdoing

A new lawsuit is accusing UBS of making an "implicit admission" in its latest earnings that its cash sweeps policies aren't in the best interest of clients.

Zurich-based UBS Group became the latest firm Thursday in a steadily growing list of wealth managers that are being sued over their handling of clients' uninvested cash. The suit against UBS — filed in federal court in Manhattan on the behalf of a South Carolina resident named Kelly Goldsmith — follows directly on similar cases filed against Ameriprise and LPL Financial earlier this week.

The suit against UBS points directly to statements executives made about the firm's cash sweeps during a second-quarter earnings call earlier this month. UBS Chief Financial Officer Todd Tuckner then announced plans to raise the interest rates paid on uninvested cash held by clients in advisory accounts.

The change, Tuckner then estimated, would reduce UBS' "pretax profits by around $50 million annually." The new suit against UBS latches on to Tuckner's words, calling them "an implicit admission that its cash sweep programs violated its obligations to its clients."

A UBS spokesman declined to comment for this article. One of the plaintiff's lawyers also declined to comment.

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The wealth management industry's $1T conflict of interest

The term "cash sweeps" refers to wealth managers' common practice of taking univested money held in brokerage and advisory accounts and moving it over to affiliated and unaffiliated banks. The firms profit when that money is then lent out or invested. 

Most of the lawsuits over sweeps accuse firms of keeping the lion's share of the money and allowing only paltry amounts to flow back to investors. That handling of uninvested cash violates financial advisors' fiduciary duty to always put their clients' interests first, according to the suits.

UBS isn't the only firm to make changes to the rates paid on its sweeps accounts amid increasing scrutiny from lawyers and regulators. Wells Fargo, which disclosed last year that the Securities and Exchange Commission is looking into its sweeps policies, announced in its second-quarter earnings that it would be increasing the rates paid on specific advisory accounts.

The change, Wells executives then estimated, would cost the firm $350 million this year. Similar to the new suit against UBS, one of the sweeps lawsuits since filed against Wells picked up on that figure as "evidence of the massive windfall the programs provide to defendants at the expense of [Wells Fargo Advisors'] customers."

The new UBS suit is being brought by the same legal team that has filed its own separate action against Wells Fargo, as well as cases against LPL Financial and Morgan Stanley. This group — made up lawyers from Simmons Hanly Conroy of San Francisco, Williams Dirks Dameron of Kansas City and Oakes & Fosher of St. Louis — starts its filings with the same phrase: "This case concerns a simple ruse."

It then goes on to compare the rates a given wealth manager offers on sweeps deposits with yields with the returns that can be obtained from other brokerages. The suit against UBS, for instance, notes that the firms pay 0.05% on anything less than $250,000 held in a sweeps account. Meanwhile, Fidelity Investments pays 4.98% and Vanguard 4.6% on the same amounts.

"Thus, other brokerage and advisory financial institutions that use sweep programs pay or secure significantly higher rates than UBS's Sweep Programs," according to the suit.

Peter Crane, the president of the money-market tracker Crane Data and the publisher of the Money Fund Intelligence newsletter, said he remains skeptical these suits will succeed. He said he thinks lawyers who are trying to gauge whether a firm like UBS has looked out for its clients' best interests should also have to take into account how investors have benefited from having advisory and brokerage accounts.

"You can't really be criticized for having cash that's underperforming without acknowledging the performance in the rest of the portfolio," Crane said. "Should UBS get a reward for having their clients, say, 90% in the stock market for the past year? From the client's perspective, that little bit of drag in cash pales in comparison with what they earned this year if they were invested in the stock market."

The S&P 500 has closed at a record high more than 30 times this year.

UBS did not say in its second-quarter earnings how much it intends to raise its sweeps rates. Its rival Morgan Stanley recently confirmed reports that it would raise its yields on certain accounts with $250,000 or more to 2%. Morgan Stanley has paid as little as 0.01% on some sweeps deposits.

Asked if UBS was considering something similar, Tuckner said in a call with analysts that it's too early to tell. With the Federal Reserve hinting that it will cut its target rates next month, it's impossible to know where rates will be in general when UBS looks to increase its sweeps yields in the fourth quarter.

Tuckner also noted that "competitive dynamics will ultimately feature in how we ultimately settle on a price for the sweep deposits."

Besides breaches of fiduciary duty, the suit against UBS accuses the firm of unjust enrichment. Like all the similar suits, this latest one seeks class-action status so the lawyers involved can use this case to represent other plaintiffs who allegedly suffered the same harm.

Michael Dell'Angelo, an executive shareholder at Berger Montague and a member of another of the legal teams suing firms over the cash sweeps policies, said Thursday that these sorts of cases are exactly what class-action suits were designed for. Taken one by one, individual clients of these wealth managers may be able to claim only small losses from the mishandling of their uninvested cash.

Only when their claims are placed in aggregate with other clients' does the extent of the damage become apparent, Dell'Angelo said.

"You have a large number of people who are allegedly being harmed in meaningful ways," he said. "But for some, it may not be substantial enough to warrant individual litigation. But together, they are being harmed in a way that is enriching the alleged wrongful actor by hundreds of millions of dollars."