Morgan Stanley continues its mutual fund overhaul

The firm is working on reducing the number of funds on its platform further and will be converting some funds investors hold from C shares into A shares

Mar 30, 2018 @ 1:33 pm

By Bruce Kelly

Morgan Stanley continues to overhaul its product platform, this week announcing changes that include cutting poor performing funds and converting buy-and-hold clients from one share class of mutual fund to another.

The ongoing changes at Morgan Stanley continue even though the Department of Labor's fiduciary rule, which is driving some of the changes, is on hold. The DOL was already reviewing the rule when a federal appeals court recently struck down the regulation.

Earlier this year, it was reported that Morgan Stanley was preparing to whittle down the selection of funds from its platform, slicing as many as 600 products from dozens of fund families from its lineup. Last year, the firm decided to eliminate new sales of Vanguard Group mutual funds that appeared to reduce a potential conflict under the DOL rule.

Trimming the number of mutual funds is an emerging pattern among the four wirehouses. While the DOL rule is on hold, the Securities and Exchange Commission is working on its own prorposal for a uniform fiduciary standard.

"The firms are recognizing that a fiduciary standard is coming and that they need to be more transparent," said Danny Sarch, an industry recruiter. "They are trying to keep ahead of whatever the fiduciary standard ends up being."

An internal Morgan Stanley memo reviewed by InvestmentNews said its investment solutions team was "taking further steps to optimize the mutual fund and money market fund platform by eliminating funds that have underperformed or have been under-utilized while maintaining choice and offering funds from a diverse set of managers."

Funds that don't meet the required criteria will be closed to new investors at the end of May. The change has an impact on a very small amount of clients' assets, the firm noted.

Meanwhile, during the first quarter next year, the firm will move some clients who hold C share class mutual funds into load-waived Class A shares. A key difference between share classes is that A shares pay a broker a one-time upfront commission while C shares pay the broker a commission annually.

"Clients who purchased a Class C share but remain invested in the position beyond the investment time horizon they expected at the time they made the purchase will benefit from exchanging to a lower cost share class," the memo stated.

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