EXCLUSIVE: Morgan Stanley Purges Vanguard Mutual Funds
Morgan Stanley is slamming the door on selling Vanguard Group mutual funds, the latest attempt by a big brokerage firm to retaliate against the low-cost fund giant for refusing to pay for access to the broker-dealer’s salesforce.
As of Monday, May 8, the world’s biggest brokerage firm will not permit its 15,800 brokers to sell new mutual funds managed by the world’s fastest-growing asset manager, a company spokeswoman confirmed. However, customers already holding Vanguard funds at the firm can add to their positions through the first quarter of 2018, and none will be forced to liquidate their Vanguard holdings, she said.
The retrenchment is part of a broader move by Morgan Stanley to cut its mutual fund menu by 25% in order to improve research and due diligence on investment products it sells, according to the spokeswoman.
Morgan Stanley continues to offer customers more than 2,300 fund products, and the funds being axed are generally less popular ones that comprise less than 5% of customers’ total mutual fund assets at the firm. They also are investments that have generally underperformed, failed to reach scale or that pose a potential for a conflict of interest, the company has told brokers, without specific allusions to Vanguard.
Brokers and consultants said that Morgan Stanley is almost certainly retaliating against Vanguard because the Valley Forge, Pennsylvania-based firm has long refused to pay any broker-dealer for “shelf space” as part of its crusade to keep expenses for investors low.
Most of Vanguard’s fund competitors pay Morgan Stanley $250,000 to $850,000 annually in order to receive access to brokers at their offices, sales conferences and other company-sponsored venues.
But the decision carries risks for Morgan Stanley at a time when retail investors have been clamoring for the low-expense index funds that Vanguard champions. Vanguard’s stance also presents risks for the company, which sells funds directly to investors but also has become increasingly reliant on sales through brokers and investment advisers.
“The wirehouses, in particular, face the issue of clients coming in and saying what about this Vanguard fund or that Vanguard fund,” said Dan Wiener, an independent adviser and publisher of a newsletter specializing in Vanguard fund performance. “Vanguard did a good job of getting people focused on the fee.”
Vanguard attracted 8.5 times as much money as the rest of the 4,000-firm mutual fund industry in the past three calendar years, much of it through its fastest-growing third-party sales channel. About half of the record $303 billion of money that flowed into its mutual and exchange-traded funds last year, and 34% of its $4 trillion of assets under management as of December 31, 2016, were originated by third-party brokers and investment advisers through the Financial Advisor Services unit.
“Vanguard does not pay for distribution—we do not pay platforms or advisors to sell our mutual funds or ETFs,” spokeswoman Emily Farrell wrote in an email. “[W]e share in the disappointment of many advisors who are not able to access conventional shares of Vanguard mutual funds on behalf of their clients.”
Morgan Stanley’s decision follows a similar one instituted last May by Merrill Lynch to forbid new sales of Vanguard mutual funds. A Merrill spokesman declined to comment on the effect on its overall sales.
Farrell declined to comment on specific firms that have pulled the plug on Vanguard products.
To be sure, Merrill and Morgan Stanley continue to permit sales of Vanguard-managed exchange-traded funds, which many brokers who trade on clients’ behalf prefer because of their intraday liquidity (while funds are priced once a day after the market closes). ETFs represented 31% of the money flowing into all Vanguard funds last year.
Wiener, who runs an independent advisory firm, said Vanguard is unlikely to be hurt by the wirehouses’ decisions.
“I don’t think they’re going to shed a tear,” he said, noting that much of Vanguard’s third-party distribution comes through independent investment advisors. “They don’t need distribution through brokerage houses, and they’re still going to get assets through their ETFs.”
—Jed Horowitz contributed to this story.