Courtesy of Pam Martens
Martin Smith, Frontline Producer
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…
…
