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Vanguard: There's “Inherent Conflict” in Paid Distribution

May 8, 2017

Following media reports that Morgan Stanley no longer allows its brokers to sell Vanguard Group’s mutual funds, Bill McNabb, Vanguard’s CEO, tells CNBC the wirehouse’s model of charging fund providers for distribution on their platforms raises conflicts of interest.

“They have a model where they want to be compensated for being on their platform in one form or another, and that’s just something we won’t do — we think it raises an inherent conflict,” McNabb tells CNBC.

McNabb also tells the TV news channel most other advice firms don’t require payment for offering a fund provider’s products and Vanguard has been “pretty successful” in the channel.

Last week, a Morgan Stanley spokeswoman confirmed to Reuters that the wirehouse’s brokers will no longer be able to sell Vanguard’s mutual funds as of the second week of May.

Vanguard’s funds made up a small portion of client assets invested in mutual funds with Morgan Stanley, she said, and the wirehouse wanted to move away from underperforming and less-popular funds.

But the move came just days after Vanguard had announced fee cuts on three more mutual funds and 14 ETFs. Morgan Stanley plans to continue offering Vanguard’s ETFs, meanwhile, and clients who already own Vanguard mutual funds aren’t required to sell them.

Meanwhile, Morgan Stanley is considering introducing a disincentive for its brokers to even keep clients in Vanguard mutual funds, the Wall Street Journal reports. The wirehouse may start excluding client assets in mutual funds such as Vanguard’s, which don’t pay Morgan Stanley for distribution, to form the basis for brokers’ compensation on accounts levied an annual fee, people familiar with the matter tell the paper.

But the firm hasn’t made a decision yet and is weighing other options that would still pay brokers for such funds, the people tell the Journal.

By Alex Padalka
  • To read the Wall Street Journal article cited in this story, click here.