The brokerage firm Morgan Stanley was in the headlines last week, but not for reasons that will make their clients happy. Morgan Stanley has decided to stop allowing the purchase of Vanguard funds for those investors working with a broker. Why would a firm restrict the purchase of the largest and lowest cost mutual fund family in the country you ask? Because Vanguard won't pay Morgan Stanley for "shelf space" as a preferred mutual fund provider. Other mutual fund companies give Morgan Stanley between $250,000 and $850,000 per year to get preferential treatment and enhanced access to the firm's brokers (salespeople). Morgan Stanley isn't alone with this policy. Merill Lynch has operated this way for some time (and also prohibits Vanguard purchases). Other firms like Wells Fargo, Edward Jones, JP Morgan, and Goldman Sachs all have similar business practices.
What does this tell you? Brokerage firms are not acting in your best interest. They're selling customers products based on the compensation they receive from the companies, not on the merits of the investments themselves. Said differently, they're sticking it to investors. Vanguard ranks highly concerning net-of-fee returns in most core asset classes. Were it not for Dimensional Fund Advisors (DFA) we would use Vanguard funds almost exclusively. But that's the difference between Servo, a Registered Investment Advisor (RIA) with a fiduciary responsibility to our clients, and a brokerage firm. We're looking out for you. Brokerage firms are only looking out for themselves. Our only form of compensation comes from the advisory fees paid directly by our clients. We don't receive a dime of compensation from any other source -- not Schwab, not DFA, and not Vanguard. And we have the freedom to use any investment strategy that we believe will best accomplish your goals.
Even if the individual brokers are trying to do the right thing, brokerage firms make it difficult. Not only has Morgan Stanley eliminated Vanguard as an investment option for their clients in the future, but they are also weighing the idea to not compensate their brokers for the portion of their clients' portfolios already in Vanguard. Morgan Stanley brokers are in the compromised position of either taking a pay cut by allowing their clients to continue to hold high-quality investments or sell them for higher cost, inferior options that pay them more. Morgan Stanley is sticking it to its brokers as well.