Philly's Morgan Stanley brokers rue firm's decision to drop Vanguard funds

Philadelphia-area Morgan Stanley brokers aren't happy with their parent company's decision to yank Vanguard funds from their offerings.

This is Morgan Stanley's fourth-largest market nationally, and local brokers fear that the decision will hurt their business — and their clients —  by not allowing Vanguard open-end mutual funds as part of their "platform," or line of funds available for investors. Vanguard exchange-traded funds will still be available.

According to AdvisorHub, the online news site that first reported the story, "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 its sales force."

Said one Morgan Stanley broker in the Philadelphia region, who asked not to be named for fear of retaliation: "This particularly hurt us, since we're in the Philadelphia area, it's a large office, and we use Vanguard funds as a financial-planning tool.

"Morgan Stanley sometimes has a mentality where they think that 'we don't need Vanguard on our platform.' We don't agree with that," the broker added.

Another broker in a regional Morgan Stanley office said, "We're complaining to the folks in New York, trying to go to bat for keeping Vanguard. It's important to us here. If I have a client with $1 million at Morgan Stanley, and $250,000 is in Vanguard S&P 500 mutual fund, it might be easier for the client to just walk and take all the money to Vanguard."

Effective Monday, Morgan Stanley's 15,800 brokers will not be allowed to sell new Vanguard mutual funds. Clients currently holding Vanguard funds will be able to add to their positions through first quarter 2018, and won't be forced to liquidate their Vanguard holdings.

Going forward, Morgan Stanley brokers and advisers will not be paid on client assets held in Vanguard funds.

"I'm actually OK with that," said one broker. "I would rather not be paid on those assets and still know that my clients won't walk out the door" because they can't buy new Vanguard funds.

Brokers said Morgan Stanley may be hitting back at Vanguard because the Valley Forge-based investment giant has long refused to pay for brokerage firm "shelf space" as part of its policy to keep expenses low for investors.

But the move may be part of a wider strategy.

"It's not just Vanguard," said one broker. "They pulled about 800 mutual funds off our platform, like AllianceBernstein and American Century. Some fund families were hurt more than others. Our job is to sell funds people want. How is removing these funds putting the client first? That's the angst."

A Morgan Stanley spokeswoman said Friday, "We announced in April a series of pricing, policy and product changes that we were going to move ahead with regardless of the status of the [Department of Labor's fiduciary] rule that was designed to further raise the standard of care for our clients. These changes are designed to reduce client costs, ensure we are offering top-quality products to clients, and reduce the potential for conflicts of interest.  …"

"One of those changes was reducing the number of mutual funds offered through our system by 25 percent," the spokeswoman said.  "While the funds we are closing to new sales [including Vanguard] represent less than 5 percent of the total mutual-fund assets held by our clients, this reduction will allow us to increase our research coverage and due diligence on the funds remaining open. We still offer over 2,300 funds so our advisers can address any need with offerings from leading asset managers and clients will not have to liquidate their holding in any of the funds we are closing."

Vanguard spokeswoman Emily M. Farrell said the company does not pay platforms or advisers to sell its funds or ETFs.

"I can't discuss the specifics of any client arrangements, but we do share in the disappointment of any advisers who are not able to access the conventional shares of Vanguard funds on behalf of their clients." Farrell said Friday. "I would note, however, that Vanguard ETFs are widely available, and many advisers are incorporating Vanguard ETFs into their construction of low-cost, broadly diversified portfolios for their clients."

Daniel Wiener, an investor and editor of the Independent Adviser for Vanguard Investors, said brokers will be able to shift their clients into Vanguard exchange-traded funds instead of open-ended mutual funds.

"I use the ETFs in my personal account, but I prefer Vanguard's active funds," Wiener said.

According to Morgan Stanley's fund disclosures (http://www.morganstanley.com/wealth/disclosures/pdfs/revenue_sharing.pdf), the global financial-services firm charges each fund family a minimum of $250,000 per year to showcase its funds on the internal platform, up to a maximum of 0.16 percent per year ($16 per $10,000 of assets).