For as long as we have been observing Wall Street sleaze (three decades and counting) we have been reading about illegal sales contests and mutual fund abuses at Morgan Stanley and its 1997 merger partner, the retail brokerage firm Dean Witter. Given that history, when we read last week that Morgan Stanley was going to gut one of the all-time best families of mutual funds from its client offerings (Vanguard Funds), we felt our readers deserved a fuller understanding of the facts than they were getting from corporate media.
Incredibly, a number of corporate media outlets tried to pass this off as Morgan Stanley attempting to ‘close out under-performing and less popular funds.’ Before we get to the nitty-gritty of why Morgan Stanley is freaking out about the respected Vanguard Funds, some necessary background is in order.
Our earliest recollection of the mutual fund outrages at Dean Witter came courtesy of BusinessWeek reporters Leah Nathans Spiro and Michael Schroeder in a February 1995 article. (Bloomberg L. P. purchased BusinessWeek from McGraw-Hill in 2009. The Bloomberg brand now shows on the online article.)
Nathans Spiro and Schroeder explain in the article why Dean Witter was pushing its own internal mutual funds on its brokers and the brokers were not pushing back. The authors write:
‘But the greatest incentives are usually for selling investments created by the firm. The reason for favoring its own products, especially mutual funds, is simple: much higher profit margins. The firm reaps a fee for managing its own funds. It gets no management fee for an outside fund…
‘The firm that’s most vulnerable on this issue is Dean Witter. It says that more than 75% of the mutual funds it sells are the house brand, probably the highest ratio in the industry. Customers who invest in Dean Witter funds pay a sales load that ostensibly compensates the broker for unbiased advice in helping them pick the best fund. Yet three times out of four, clients are simply ushered into Dean Witter funds. One reason: Brokers receive 5% to 15% more for selling Dean Witter funds than for outside funds. ‘It’s like calling yourself a car consultant when you sell Fords,’ says Don Phillips, publisher of Morningstar Mutual Funds.’
Seven months after the BusinessWeek article appeared, the Washington Post stunned Wall Street by publishing an insider’s allegations against Dean Witter. Les Silverstone was a respected, retired broker from Dean Witter. He blew the whistle on the lavish prizes brokers were getting for selling select products.
This post was published at Wall Street On Parade By Pam Marte.
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