Should fund providers be re-evaluated?

Putting clients’ interests first could mean a major streamlining in fund distribution

Should fund providers be re-evaluated?

Brokerage titan Morgan Stanley has stopped offering mutual funds from Vanguard — and it could be because of the US Depart of Labor’s (DOL) fiduciary rule.

Recently, Vanguard CEO Bill McNabb spoke out against the industry practice of fund providers being charged to have their funds distributed on wirehouses’ platforms, reported Financial Advisor IQ. According to him, compensating wirehouses for the chance to get “shelf space” on the platform raises an inherent conflict of interest, which is why Vanguard doesn’t pay for distribution of its products on brokerage platforms.

This puts it out of line with many other fund providers who pay wirehouses, including Morgan Stanley, for the privilege of distribution. Earlier this month, Morgan Stanley stopped offering funds from Vanguard on its platform, and the decision might have been made to avoid conflicts of interest targeted by the fiduciary rule.

One of the provisions of the rule is that fund distributors must maintain consistent practices with all the fund providers they deal with. Since Morgan Stanley has to “treat everyone the same now,” the wirehouse may have dropped Vanguard because it doesn’t pay for shelf space like other fund providers, an unnamed Mortgage Stanley advisor — who claims to have no direct knowledge about the decision — told Investment News.

Now brokerage firms face a challenge: to figure out how to collect distribution charges from fund providers in a way that complies with the fiduciary rule. Marcia Wagner of the Wagner Law Group called the situation “a compliance nightmare” for brokerages, forcing large brokerages to cut down on the number of providers they work with.

Morgan Stanley has reduced the number of mutual funds it offers on its platform by 25%, according to Investment News. A spokeswoman from the wirehouse said the firm was aiming to have “consistent economic arrangements” with its partners when assessing funds that go on its platform.

Merrill Lynch has slashed the number of fund it offers from 3,500 to 2,000, and it doesn’t allow clients to buy Vanguard mutual funds. Industry sources speaking to Investment News have said that UBS and Wells Fargo Advisors do not intend to stop offering funds from Vanguard.

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