By Michael Wursthorn and Sarah Krouse
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 brokerage arms of Wells Fargo & Co. and UBS Group AG,
two of the other big traditional brokerages, haven't dropped
Vanguard's funds, people familiar with their sales practices
said.
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.
Michael Wong, a wealth-management researcher with Morningstar,
said he was surprised by the Morgan Stanley move. "Vanguard, among
the fund world, is a household name, so I would assume there would
be some client demand for it," he said.
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.
Morgan Stanley clients currently invested in Vanguard mutual
funds won't be forced to sell, and they can add to those positions
through early next year. The brokerage will continue to offer
Vanguard exchange-traded funds, said Mr. Dunbar.
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.
Merrill, meanwhile, has for some time restricted the sale of new
shares of Vanguard mutual funds to clients who don't have an
existing position, said Merrill brokers familiar with the matter.
Clients who come to the firm with existing positions can add to
those, as long as they have research coverage by Merrill's chief
investment office or a Morningstar analyst, they added.
As at Morgan Stanley, Merrill Lynch's ban on buying Vanguard
mutual funds doesn't apply to Vanguard ETFs. And investors who
direct their own investments through Merrill Edge, Bank of America
Corp.'s self-service investment platform, can buy Vanguard mutual
funds and ETFs without restrictions.
Brokers at both firms say they usually favor ETFs, including
Vanguard's, for investors who want a passive investment strategy
because they tend to be cheaper and more tax efficient than mutual
funds.
Morgan Stanley, which has more than 15,000 brokers, said it is
removing the Vanguard funds as part of a broader overhaul of its
mutual-fund offerings. Over the past 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.
"This reduction will allow us to increase our research coverage
and due diligence on the funds remaining open," said Mr. Dunbar,
adding that the firm offers more than 2,300 funds to its
clients.
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.
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."
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 and 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.
Ben Phillips, principal at Casey Quirk, a Deloitte Consulting
LLP practice focused on the asset-management industry, said that
industrywide, "the large distributors in the mutual fund world are
centralizing their powers as gatekeepers and using it."
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com and
Sarah Krouse at sarah.krouse@wsj.com
(END) Dow Jones Newswires
May 04, 2017 15:53 ET (19:53 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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