Ex-Vanguard CEO Endorses Fund Firms Paying for Shelf Space
Jack Brennan, senior adviser and former chairman and chief executive of The Vanguard Group, said broker-dealers have the right to charge fund companies for so-called shelf space on their product platforms.
The pronouncement, made at the opening session of the Financial Industry and Regulatory Authority’s annual conference in Washington on Tuesday, is common wisdom but turned heads because Morgan Stanley earlier this month stopped selling Vanguard funds because the mutual fund giant refuses to pay firms for their sales efforts.
Morgan Stanley’s decision sparked headlines because Vanguard runs some of the most expense-efficient funds in the investment management industry, permitting more of investors’ money to go directly into investments rather than for investment management and administrative fees.
Morgan Stanley, which charges as much as $800,000 annually to fund companies for access to its more than 15,000 brokers and sales data on their funds, was putting its own interests ahead of its customers, some critics said.
Brennan did not specifically address the Morgan Stanley controversy but raised the issue of shelf-space payments in the context of describing how greatly the securities industry has changed since he began his career at the then-small Vanguard in 1982.
“Distributors gave away distribution almost for free to the product manufacturers,” he said in a “fireside chat” with Finra President and CEO Robert Cook. “As a product provider you pay for the right to be on a platform and I think, for the most part, that’s a good thing.”
Brennan, who is serving in his last year as chairman of the industry self-regulatory group, said arrangements between fund companies and brokerage firms today are largely “in balance.”
The former Vanguard executive said he had no crystal ball as to the ultimate fate of the Department of Labor fiduciary rule for retirement account investments that is scheduled to begin taking effect on June 9 but believes it has already had a salutary effect for investors because of firm and fund company adaptations.
“Whatever happens to DOL it served its purpose by setting the best-interest [of customer] terminology into the industry and into the press and into a lot of things,” Brennan said. “Firms should keep on that track because it’s the track that it’s going to be the way business is done.”
Changes already taking place in terms of lower-expense mutual fund share classes and elimination of commission trails in retirement accounts also can help brokers rebuild public trust in the industry, he said.
“Seeing what the industry did with the prospect of the rule shows that it can be done and the advisor can still have a very good income and the firms can do well,” Brennan said.
Regardless of whether the Trump administration further delays or halts imposition of the fiduciary standard, Cook and Brennan said in remarks to reporters afterwards that they would like the Securities and Exchange Commission to develop a harmonized best-interest standard to apply across standard accounts as well as retirement accounts. That is in line with arguments of brokerage and investment management industry trade groups, who say the public will be confused by inconsistent customer-care standards in various accounts.
Brennan also suggested that Finra can provide a balanced perspective between industry business requirements and the need to protect retail investors and the markets. For example, a harmonized standard could allow some some “variations” in retirement accounts.
“If someone wants to buy a load fund in an IRA once, that’s a good deal so let them do it,” he said.
Addressing the audience of compliance officials at the Finra conference, he said they should draw lines in the sand about getting support for their efforts from top executives at their firms.
“The CCO [chief compliance officer] needs to be in the CEO’s face,” he said, noting that they must convince their bosses that establishing client trust through compliance with regulations is a primary corporate obligation.
“I’d be relentless in demanding that he or she participate in public forums with you at the firm,” Brennan said. “If they’re not receptive, I’d buff up my resume personally.”