As of next week, Morgan Stanley brokers won’t be allowed to sell Vanguard Group mutual funds anymore. Morgan Stanley says that this is because they are either bad, too small, a possible conflict of interest or all of the above, but it’s really because Vanguard funds are cheap. Specifically, because they are too cheap to pay Morgan Stanley (or any other brokerage house, for that matter) the $250K-$850K annual tribute said brokerage houses demand in exchange for offering their services. Vanguard counters that refusing to pay those, uh, fees is precisely why its funds are so cheap, and thus so beloved of Warren Buffett and investors everywhere, who over the past three years have given Vanguard just a hair under 90% of all mutual fund inflows. Scoreboard: Vanguard $823 billion, everyone else combined $97 billion. Put it in the books.
Morgan Stanley’s not the first scorned brokerage to tell Vanguard to take a hike; Merrill Lynch stormed off in a huff about it last year. But it is afraid that its 16,000 or so brokers might not be getting the message. After all, their customers are allowed to add to their Vanguard hoards through the beginning of next year, and the brokers will still be allowed to trade Vanguard’s ultra-liquid ETFs. How’s an angry brokerage to make itself clear?
In calculating adviser compensation for customer accounts that are charged an annual fee, Morgan Stanley may no longer count client assets in mutual funds that don’t pay the bank for distribution, the people said….
Compensation for financial advisers is typically calculated based on the amount of fees and commissions they generate with their respective books of business, the total client assets under management. The plan under consideration would exclude assets in Vanguard funds from those calculations, the people said.
Will this curiously selective form of blindness extend to determining how much of a client’s account Morgan Stanley gets to take for itself?