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Morgan Stanley drops Vanguard mutual funds

The Morgan Stanley logo is displayed at the New York Stock Exchange on April 19, 2017. (Brendan McDermid/Reuters)
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Morgan Stanley announced this week that it will stop offering mutual funds from the popular low-cost fund firm Vanguard.

Starting on Monday, customers of the brokerage firm will no longer be able to buy Vanguard mutual funds, including the firm’s commonly used index funds. Investors won’t be forced to sell their current Vanguard funds. And they will still be able to buy more shares of funds they already own until March 2018.

Analysts say it’s notable for the brokerage firm to drop Vanguard, which has ballooned in popularity over the past several years as investors have flocked to less expensive index funds, which track the broader market and are cheaper than funds run by stock pickers.

The move may be motivated, in part, by the fact that Vanguard does not pay brokerage firms for the ability to have their funds sold on their platforms, says Paul Ellenbogen, head of global regulatory solutions at Morningstar, a fund research firm.

With more investors turning to inexpensive robo-advisers over traditional money managers, some brokerage firms may be struggling to add more revenue, Ellenbogen said. By cutting Vanguard funds, the firm can clear more room for firms that are willing to pay for the shelf space. “Morgan Stanley has said in this new world, we need to somehow make money,” Ellenbogen says.

But Morgan Stanley says the move is part of a broader strategy to reduce its mutual fund offerings by 25 percent, down to 2,300 funds. The funds being removed next week are not popular with customers and account for less than 5 percent of the mutual fund assets held by Morgan Stanley clients, spokeswoman Christine Jockle said in an email. The firm will continue to sell Vanguard exchange-traded funds.

The news of Morgan Stanley’s decision to drop Vanguard mutual funds was first reported by AdvisorHub, an investment news site.

The new policy may not have a huge impact on Vanguard, which doesn’t rely on broker dealers as a way to attract new assets, Ellenbogen said. Much of Vanguard’s asset growth has come from people buying mutual funds and exchange-traded funds directly from the company. The firm also draws a lot of investors through its retirement business.

Morgan Stanley is shedding Vanguard’s mutual funds at a time when investors, lawmakers and consumer advocates are paying closer attention to the fees charged by investment firms.

A Labor Department rule that is being challenged by Republicans and the financial industry would require brokers working with retirement savers to put their clients’ interests first. That could make it harder for brokers to recommend investments that lead them to collect bigger payouts. In anticipation of the rule, some investment firms have lowered fees, eliminated commission-based accounts and introduced new fee structures that could reduce the potential for conflicts of interest.