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Morgan Stanley Dumps Vanguard


Michael Wursthorn and Sarah Krouse, writing for Fox Business:

Morgan Stanley will soon prevent its clients from buying Vanguard Group's mutual funds, the latest big Wall Street brokerage to mostly shut out some of the index giant's funds.

Starting next week, Morgan Stanley brokers will no longer be able to sell their clients new positions in Vanguard mutual funds, including its popular index offerings, the bank confirmed. Merrill Lynch, meanwhile, already doesn't allow new clients to purchase new shares of Vanguard's mutual funds, said Merrill brokers familiar with the matter, adding that it has been a longstanding policy of the Bank of America Corp.-owned brokerage. [...]

The restrictions come as Vanguard has boomed amid investors' embrace of funds that mimic broad indexes for a fraction of the cost of actively managed funds. The Malvern, Pa., firm brought in $289 billion last year, or 54%, of the $533 billion that flowed into all mutual funds and exchange-traded funds, according to research firm Morningstar Inc. [...]

Morgan Stanley, which oversees $2.2 trillion of client assets, says Vanguard's funds are unpopular with its clients. Vanguard's mutual funds represented less than 5% of Morgan Stanley's total mutual-fund assets, said bank spokesman Bruce Dunbar.

Kinda reminds me of something Yogi Berra said, "Nobody goes there anymore. It's too crowded." Vanguard funds took in more money last year than ALL of its competitors, combined.

Vanguard is unusual among fund firms because it has a policy of not paying other firms to sell its funds. Many fund firms have long paid for shelf space on platforms or had revenue-sharing agreements with brokerages.

A spokeswoman for Vanguard said, "We share in the disappointment of advisers who are not able to access conventional shares of our mutual funds," adding that it doesn't pay any brokerage firm or its advisers for the distribution of its funds. [...]

Morgan Stanley's move shows that the economics of fund distribution -- what fund firms must pay large financial firms to sell their products to investors -- are in flux. Gatekeepers like Morgan Stanley are using their muscle to protect their own revenue even as disrupters like Vanguard gather assets at a fast clip.

Brent Beardsley, managing director at Boston Consulting Group, said as brokerage firms trim the number of funds they sell, asset managers that remain "are going to get a lot of flows, but I suspect they are going to have to pay more."

So this is the real reason Vanguard funds1 are unpopular with clients of Morgan Stanley — Vanguard does not pay Morgan Stanley under the table to get it to use its funds. It would appear that Morgan Stanley brokers prefer to place its clients in funds that do pay them under the table.

Do yourself a favor — make sure your investment advisor is free from conflicts, or at least discloses them when they appear. Find yourself a Registered Investment Adviser (RIA), not a broker.


1Mutual funds, exchange-traded funds and exchange-traded notes are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained directly from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.