As Morgan Stanley and other firms move to push some providers like Vanguard off their product platforms ahead of the now-delayed Department of Labor fiduciary standard, it’s possible that their advisors may get less or no compensation for assets clients want to keep in these holdings.
According to a report in Friday’s Wall Street Journal, Morgan Stanley is considering several options – including taking these assets out of fee and other compensation arrangement for its FAs. Though a decision hasn’t been reached yet, such a move is possible as are plans that may still pay advisors for such funds, people familiar with the issue told the paper.
As of next week, Morgan Stanley’s 15,700-plus reps can no longer offer new sales of Vanguard mutual funds, though they can sell Vanguard ETFs. Clients who previously bought and are holding these funds in their accounts are not being asked to sell them, and they can expand these positions until early 2018.
Such moves are being questioned by fund specialists like Paul D. Ellenbogen of Morningstar, as the industry grapples with a now-delayed Department of Labor fiduciary standard: “How do you explain that on a BIC [best interest contract] basis?” asked the head of Global Regulatory Solutions. “It’s not like these [Vanguard] funds are pricey or of poor quality.”
In other words, “Advisors can make the case to clients that they should move to cheaper funds or those with great diversification or higher quality,” Ellenbogen said. But that’s not what’s happening at the wirehouse.
Morgan Stanley’s moves appear to be happening in sync with the June 9, 2017, and Jan. 1, 2018, compliance deadlines for the fiduciary rule, sources say. The firm reported total client assets of $2.2 trillion in its first-quarter earnings statement.
“This seems to be all about compensation to the advisor not about the client or asset management,” he added. “It’s about somebody getting paid – not about providing advice. An independent advisor would say, ‘Let’s stay in [the cheaper product].’ ”
The wirehouse told its reps in April that it was making a series of pricing, policy and product changes “regardless of the status of the DOL rule that were designed to further raise the standard of care for our clients,” according to a statement. “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.”
These changes entailed dropping the number of funds available to clients by 25%.
“While the funds we are closing to new sales (including Vanguard) represent less than 5% 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,” it explained.
The firm says clients have a menu of about 2,300 funds to choose from.
To outsiders like Ellenbogen, the elimination of Vanguard funds from platforms at Morgan Stanley and other traditional firms such as Merrill Lynch works against those firms.
It could prompt some clients to ask, “Why work with an old-fashioned firm?” he said.
“You can go to Vanguard [directly] … and pay a lot less than 1% of assets, which is true at Charles Schwab, TD Ameritrade and other brokerage firms that are willing to do what traditional financial planners do for a lot less money,” the Morningstar regulatory chief explained.
At the wirehouses and similar BDs, “You’re left with sophisticated tax-deferral [strategies] and such, but that is not what the average investor is looking for,” he said.
And even the wealthiest clients might find a reason to take their assets and leave Morgan Stanley.
“They could say to their advisor, ‘My nephew invests at Betterment, and other than this fancy office, what does Morgan Stanley do that they don’t?’” Ellenbogen explained.
Wealthy clients can work with tax accountants and attorneys, for instance, on an hourly basis — rather than on an asset basis, he points out. After moving their money out of a wirehouse, “they could turn to other professionals for occasional advice … rather than paying 1% of assets on an ongoing basis.”
— Check out Wirehouses Roll Out New Structures and Strategies on ThinkAdvisor.