Morgan Stanley is Dropping Vanguard Funds

Bhahaha...

Add Morgan Stanley to the list of companies like Sears & Radio Shack that stubbornly refuse to adapt to change.

“We’re margin driven rather than volume driven and there’s no margin in these super-efficient, super-popular, and super-destined to continue supplanting old school offerings like what we have funds”

”What should we do boss?”

”Drop ‘um, that’ll resolve the problem”.

Yahoo Finance Article

Durp - Durp - Durp

Maybe I'm missing something, but it sounds like reasonable logic to me.

If there is no broker's margin, why should MS sell Vanguard? That would make no sense (and MS clients are probably looking for a different type of service anyway).

That doesn't mean MS is better than Vanguard for YOU (or me), it just means Vanguard isn't a product MS can sell profitably.

It sounds like you are saying MS should join the 21sr century and sell products (like Vanguard) that they loose money on. I sure hope my boss never does that.

Am I missing something?

In reply to SVreX:

Respectfully, I do think you are.

As a practicing statistician that has studied investing and the performance of investment consulting businesses for decades, I know that 90%+ of investors will wind up with a larger (usually much larger) portfolio by just putting their money in super low-load index funds than having someone actively manage it for them.

Now, Morgan Stanley could do just fine without the handful of us math nerds that have studied this stuff and know better but the knowledge keeps penetrating lower and lower through the population. Earlier this week, I read an interview with Warren Buffett where he said “99% of investors should just put their money in low-load index funds”. I’m sure I’ve heard Buffett say this a ½ dozen times before so the word has and is getting out.

The level of information and communication today is just too great for any business to remain healthy by answering the question “why do people pay us” with “because they don’t know any better”.

Morgan Stanley is making a huge mistake…people aren’t going to stop buying Vanguard funds, they’re going to stop doing business with firms that don’t offer them.

I’m pretty sure the top people at MS know this…they’ve just decided to let the gravy train run until it crashes rather than do the hard and risky work of transforming their business model to adapt to change…see Sears, Toy R Us, Radio Shack, etc.

It's worth noting that they say you can still buy Vanguard funds through their ETF equivalent with Morgan Stanley. The difference being that Morgan Stanley advisors probably won't suggest those funds to clients interested in mutual funds as they're traded like stocks and not like mutual funds. It gives them an "out" to preserve their commissions and fees that they wouldn't earn if the client bought Vanguard funds.

Don't most people do business with whatever investment company their retirement plan is through for wherever they work? I don't see people switching their personal accounts away from wherever their employer-matched plan is.

In reply to Kylini:

That is usually one of the first suggestions I make. Having your funds in two accounts with two firms cuts the odds of you losing everything to fraud down considerably. And your employer may not be choosing a brokerage on your needs.

In reply to RX Reven':

I may be, but I'm still not sure we are in the same page.

I'm hearing you say that a low fee investment tool like Vanguard will make a large difference over time for the returns to the investor. I completely agree.

But my question is, what is the most profitable product for MS to sell? I don't actually think they give a damn about long term returns for individual investors. (And probably shouldn't).

Sure, the best decision for us may be to invest in Vanguard. But that may not be the best decision for MS.

That doesn't necessarily make them irrelevant like Sears. It just means they are selling a particular product to a particular client, and we don't have to buy it.

I think the humor is the thinly veiled attempts by many of the brokerage firms to move away from Vanguard funds because they can't make money on them, and try to explain their way out of "we're thinking about our bottom line and not those of our customers."

Consumers just don't trust banks and other financial institutions anymore because of this type of stuff. When cheap, replace-every-year products like Apple iPhones have better customer trust than lifetime investments, its pretty disappointing.

I don't think it is thinly veiled at all. ALL companies 1st priority should be their profit margin. Without it, they fail at their primary mission, and cannot provide jobs for their employees.

Apple does it too. The only difference is you can't build an iPhone, and you think they are cool.

I don't have to buy their services, but they DO have to be profitable.

In reply to RX Reven':

I figured it'd be a matter of time before that happened. All my retirement money is loaded into a couple sets of ultra low load funds from Vanguard (.06 or less). No point in paying absurd fees for something that statistically won't out perform the market.

I don't remember where I saw the statistic but something like a 1% load fee will net the brokerage company 66% of the funds profits over the life of the account.

That's absurd IMO.

I have made the choice to no longer provide residential construction services. Why? Because there are no profits.

I think that was a perfectly reasonable business decision. I don't have an obligation to provide services to consumers at a net loss just so they can save money. But, they have no obligation to buy my services either.

I'm good with that.

In reply to SVreX:

I think the clients you’re referring to could be described as high net worth individuals that are willing to pay a premium to have access to special services.

If that’s the case, I agree with you and I think a sustainable business model could be built on catering to the desires of those individuals.

However, any fees that are proportional to the amount invested represent the same level of disincentive to the full spectrum of clients ranging from those just starting out with a few thousand dollars to those that have a net worth of 10 million+ dollars.

”We here at MS have a special service that low cost brokers don’t offer and we charge $500 for it” – Possible selling point for high net worth clients.

“We here at MS erode 1% more of your annual returns than the competition” – New investors and high net worth investors in unison “Ah, hell no!!!”.

In my opinion, MS’s days are numbered if they don’t limit themselves to only charging a premium for services that are above and beyond what the competition has to offer…their announcement today suggests to me that they’re taking the lazy path and just buying some time.

I’m not directly affected by the announcement…I just see businesses make what appear to me to be fatal mistakes from time to time and I enjoy following them see if I was right; time will tell.

The0retical wrote: In reply to RX Reven': I don't remember where I saw the statistic but something like a 1% load fee will net the brokerage company 66% of the funds profits over the life of the account.

Hi The Oretical,

The author is a Ph.D. statistician and he looks at success in a wide range of venues (sports, investing, etc.)

Buy the book and pick up a thank you card while you're at it as you’ll want to send me one.

In reply to RX Reven':

Thanks, I'll pick up a thank you card as well. That's exactly the kind of stuff I read.

Svrex,

I agree, but the difference between you and Morgan Stanley is their product IS (supposedly) more money for the customer.

I don't think it's gonna make one iota of difference. Most people have no clue what they're doing, which is why they go to MS in the first place.

If I understand Rxs point it is more that. Rather than MS focussing on profit generated the old fashioned way of margin. Like record companies focussing on CDs. They should keep the funds people like and try to transform into a company that can be profitable in new ways. My uncle was and A&R for a big music label. He lived the transition when management refused to change the business of cd sale percentage for the artist. So he lost some major acts to other labels that simply gave up 100% of the cd sale profits and focused on selling artist for advertising.

Apple started with computers then fell off and came back with the music CD killer. It isn't awesome because of the iPhone as much as it awesome because the iPhone provides seamless access to Apple's cloudware of iTunes content and other iPhone users. Apple awesomeness has little to nothing to do with computer.

MS shouldn't just stop selling the fund but instead should try to be profitable with it.

Robbie wrote: Svrex, I agree, but the difference between you and Morgan Stanley is their product IS (supposedly) more money for the customer.

That's sweet. I like that idea.

It's not true, but I like it anyway.

mtn wrote: I don't think it's gonna make one iota of difference. Most people have no clue what they're doing, which is why they go to MS in the first place.

Yea. This^^^

Morgan Stanley was charging my parents 3.09% for some of their recommendations.

RX Reven' wrote: Bhahaha... Add Morgan Stanley to the list of companies like Sears & Radio Shack that stubbornly refuse to adapt to change. “We’re margin driven rather than volume driven and there’s no margin in these super-efficient, super-popular, and super-destined to continue supplanting old school offerings like what we have funds” ”What should we do boss?” ”Drop ‘um, that’ll resolve the problem”. Yahoo Finance Article Durp - Durp - Durp

You realize these funds routinely underperform actively managed funds? MS wants to have funds which they can manage, and grow, so they can, you know, make more money since they're paid off the value of the account.

In addition, the new fiduciary rules require them to act in the best interests of their clients. Vanguard funds are rarely, if ever, in the best interests of the client - they are almost exclusively used by people who want a "cheap" fund but don't realize that working with a planner will yield a 2-3% higher return, net of any fees.

Ricky Spanish wrote:

RX Reven' wrote: Bhahaha... Add Morgan Stanley to the list of companies like Sears & Radio Shack that stubbornly refuse to adapt to change. “We’re margin driven rather than volume driven and there’s no margin in these super-efficient, super-popular, and super-destined to continue supplanting old school offerings like what we have funds” ”What should we do boss?” ”Drop ‘um, that’ll resolve the problem”. Yahoo Finance Article Durp - Durp - Durp

You realize these funds routinely underperform actively managed funds? MS wants to have funds which they can manage, and grow, so they can, you know, make more money since they're paid off the value of the account. In addition, the new fiduciary rules require them to act in the best interests of their clients. Vanguard funds are rarely, if ever, in the best interests of the client - they are almost exclusively used by people who want a "cheap" fund but don't realize that working with a planner will yield a 2-3% higher return, net of any fees.

Show me the data on this.

mtn wrote:

Ricky Spanish wrote:

RX Reven' wrote: Bhahaha... Add Morgan Stanley to the list of companies like Sears & Radio Shack that stubbornly refuse to adapt to change. “We’re margin driven rather than volume driven and there’s no margin in these super-efficient, super-popular, and super-destined to continue supplanting old school offerings like what we have funds” ”What should we do boss?” ”Drop ‘um, that’ll resolve the problem”. Yahoo Finance Article Durp - Durp - Durp

You realize these funds routinely underperform actively managed funds? MS wants to have funds which they can manage, and grow, so they can, you know, make more money since they're paid off the value of the account. In addition, the new fiduciary rules require them to act in the best interests of their clients. Vanguard funds are rarely, if ever, in the best interests of the client - they are almost exclusively used by people who want a "cheap" fund but don't realize that working with a planner will yield a 2-3% higher return, net of any fees.

Show me the data on this.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2195138 ("Respondents who rely on an advisor to help plan for retirement save more than those who do it themselves and are more likely to own tax advantaged accounts.")

https://www.kitces.com/blog/hierarachy-of-financial-advisor-value/ - ("on a utility-adjusted basis, better planning allows for an increase in retirement income of 29 percent.")

http://www.investopedia.com/articles/personal-finance/102616/how-much-can-advisor-help-your-returns-how-about-3-worth.asp - (", a stalwart low-cost investment management company, released a study titled Advisor’s Alpha. This study estimates that clients who work with a good financial advisor will receive on average a 3% increase in the value of their portfolios each year.")

http://corporate.morningstar.com/ib/documents/PublishedResearch/AlphaBetaandNowGamma.pdf - ("a good advisor can add the equivalent of a 1.82 percent annual arithmetic return to clients")

https://www.forbes.com/sites/wadepfau/2015/07/21/the-value-of-financial-advice/2/#cbb04b75245f - ("overall estimate for Advisor Alpha is 3% on a net basis [4% less an assumed 1% fee])"

There's two different concepts there that are getting mixed up. One is whether it makes sense to pay for financial advice and the other is what investments are made with that advice. It's not that Vanguard funds are a bad choice-- they're not. It's whether you are investing in the right types of investments. I didn't read all those articles, but the investopedia one (written by a financial planner) and the other summaries all point to investing in the right things, not whether Vanguard funds yield better or worse or whether "cheap" funds or a bad idea or not. In fact, the investopedia article suggests a Vanguard target date fund might be a good way to go for someone that would otherwise be thrashing about on their own without expertise.

Everything I've read says that the index funds perform at least as well as active managed funds over time. And they yield better due to the lack of the high fees that go with the latter.

Full disclosure, I'm a Bogle-head and fired my UBS advisor about three years ago. She was charging me 1% per annum to invest in funds that typically charged another 1% or more per annum management fees. She made more money on some of my investments than I did!

I've got just about everything in Vanguard, now, with various funds, and haven't looked back. I also manage and choose my own investments, but I've got an MBA in finance. I agree that most people should get advice. But pay a CFP to give advice and not a "portfolio manager" to actively manage your assets for you.

In reply to Ricky Spanish:

Nice fluff pieces. Their math assumes fully half of that 3% is from their guidance to "stay the course". So, if you can do that on your own, there is NO value. Their other assumptions are similar.

Heres my response to that: Active vs index

Warren Buffett's 10 year bet of index funds vs. 5 of the top active managers. The index funds are up 85% after 9 years, the active managers are up 22% (average), and the best of the 5 is at 63%, so still underperforming.

Active management does not beat index funds that are left alone to grow for the long term.

Feel free to pick that mic back up whenever. I'll be here all week.