Social Darwinism is a theory that suggests the rules of natural selection associated with plants and animals are also applicable to individuals and groups of people. The rules of finance don’t always operate by this model. For instance, consider Morgan Stanley’s decision a few months ago to eliminate Vanguard products from their platform.
The decision wasn’t made because Vanguard wasn’t popular—in fact, the fund family lead all of its peers with inflows in 2017. It is also unlikely that brokers revolted against Vanguard, as we presume that the lower cost fund family helped client portfolios grow with less fee drag than costlier mutual funds, for example. So why would Morgan Stanley remove Vanguard’s funds and threaten to do the same to other fund families?
Vanguard refuses to do the one thing the major brokerage firms require in order to pass their due diligence: pay to play.
This makes Vanguard one of the few fund families that refuse to do so. We commend Vanguard’s decision because paying brokerage firms to pass a due diligence screen doesn’t pass our smell test. It is an obvious conflict of interest for clients.
Just the same, we think that Morgan Stanley’s spin was disingenuous at best.
“As we announced in 2017, we will continue on an ongoing basis to rationalize the number of products with the goal of offering the highest quality platform while reducing the number of redundant strategies,” the company said in a prepared statement. “For the best interest of our clients, we are eliminating funds that have underperformed or have been unsuccessful in raising assets on our platform while also expanding the number of strategies that are covered by the Global Investment Manager Analysis team.”
This strikes us as science fiction.
Brokerage firms have long been guilty of populating their menu of available investments with mutual funds that have higher costs and lower returns than Vanguard funds. In this case, it is evident that Morgan Stanley’s due diligence and suitability screens begin and end with kickbacks. While these larger brokerage firms don’t claim to be fiduciaries, we think this is a clear example of how a client can suffer as a result. Instead, Morgan Stanley has prioritized
We commend Vanguard for refusing to pay to play and we believe that Morgan Stanley is on the wrong side of Darwinism in financial services.