Morgan Stanley Dumps Vanguard Mutual Funds

By Michael Wursthorn and Sarah Krouse Features Dow Jones Newswires

Morgan Stanley will soon prevent its clients from buying Vanguard Group's mutual funds, pitting one of Wall Street's largest sellers of mutual funds against the index-fund giant.

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Starting next week, Morgan Stanley brokers will no longer be able to sell their clients Vanguard mutual-funds, including its popular index offerings, the bank confirmed. Morgan Stanley clients currently invested in Vanguard funds won't be forced to sell, and the brokerage will continue to offer the index-fund giant's exchange-traded funds, said Morgan Stanley spokesman Bruce Dunbar.

A spokeswoman for Vanguard, the fastest-growing asset manager in the U.S. with $4.2 trillion of assets, said, "We share in the disappointment of advisors 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, which has more than 15,000 brokers who oversee about $2.2 trillion in client assets, said it is removing the Vanguard funds as part of a broader overhaul of its mutual-fund offerings. Over the last several months, the firm has been cutting 25% of funds it deems less popular or underperforming, a process it kicked off to help it comply with the Labor Department's fiduciary rule requiring brokers to act in the best interest of retirement savers.

Even though Vanguard has been collecting more assets than its competitors in the last year, the fund giant's mutual funds represented less than 5% of Morgan Stanley's total mutual fund assets, Mr. Dunbar said.

"This reduction will allow us to increase our research coverage and due diligence on the funds remaining open," said Morgan Stanley's spokesman said, adding that it now offers more than 2,300 funds to its clients.

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AdvisorHub earlier reported Morgan Stanley's removal of Vanguard 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.

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 advisers.

At the same time, the money-management industry is contending with changing investor preferences as lower-cost index-tracking funds become more popular. Cost-sensitive investors have poured hundreds of billions of dollars into lower-cost index-tracking funds in recent years.

Managers of many index actively managed mutual funds have trimmed their fund fees to better compete. Still, paying platforms and advisers for distribution at a time when fees are falling squeezes the revenue fund firms collect.

Potential regulatory changes add further complexity. The fiduciary rule has led some platforms and networks of advisers to trim their lineup of products. Merrill Lynch, a key rival of Morgan Stanley, slimmed down its own mutual-fund offerings last year.

Write to Michael Wursthorn at Michael.Wursthorn@wsj.com and Sarah Krouse at sarah.krouse@wsj.com

(END) Dow Jones Newswires

May 04, 2017 11:34 ET (15:34 GMT)