Former UBS, Morgan Stanley Executive Attacks ‘Pay to Play’ Policies
(Adds Straus’ comment on his firm’s progress in ninth paragraph.)
The former head of private wealth management at Morgan Stanley and UBS Financial Services went on the attack against those firms’ policies of promoting mutual funds and exchange-traded funds that pay the companies to sell their wares while ignoring money managers with superior investment records.
In an attempt to attract brokers managing $1 billion or more of client assets to his new brokerage firm, John A. Straus plans to post an essay on the accusing his former employers and Merrill Lynch of hurting clients by restricting fund product menus to firms that pay while refusing to share the sordid benefits with brokers.
“Advisors should care that they are not seeing managers they should see,” Straus, chairman and chief executive of FallLine Securities, said in an interview. “A lot of great managers will not pay to play. And a lot of advisers are wrong when they tell their clients that they are using open architecture.”
Straus, whose firm clears through Raymond James Financial and expects to sign up its first advisory team in late spring, took to extend its pay-for-distribution policies from mutual funds to exchange-traded funds as a starting point in the essay he shared with k-tcc.
“In its conflict disclosure, Morgan Stanley is quick to point out that notwithstanding this new pay-to-play scheme, they have substantially mitigated the conflict of interest with their clients by limiting any additional compensation to their brokers for selling ETFs,” the essay says. “In fact, by keeping 100% of the fee they have simultaneously exacerbated the conflict at the firm level, increased non-compensable revenue (which they love), alienated financial advisers, limited client choice and helped pave the road to increasing overall costs to clients for investments that have historically been low-cost options.”
Straus quotes a disclosure document from Merrill Lynch that says funds without pay-to-play arrangements are generally not offered to clients. His essay congratulates UBS for being forthright in its disclosure documents about the conflict of interest raised by its shelf-space payment policies but adds, “Too bad it is buried within other extensive disclosure, and you have to be a detective to find it.”
Spokespeople at Morgan Stanley, Merrill and UBS did not respond to requests for comment.
Straus, to be sure, appears to be struggling to get his Darien, Conn-based firm off the ground. It was registered in March 2014, according to the Financial Industry Regulatory Authority’s BrokerCheck database, but Straus said he could not give details about the first team that has agreed to join the full-service firm.
“We are right on plan,” he said, noting that FallLine put the finishing touches on its platform two months ago.
FallLine offers turnkey technology and research on money management firms to advisers serving clients with at least $25 million of net worth, he said. Each advisor will operate under its own name with FallLine operating as the “independent” broker-dealer in the background.
It will collect 20% of commissions advisors charge on private placements and other specialized transactions but expects to obtain most of its revenue through an asset-based platform fee charged to advisors, Straus said.