Morgan Stanley has a message for the exchange-traded fund world: Pay up. Or else.
The firm has told some fund issuers to pay a fee or risk having future offerings blocked from its sales network, people familiar with the matter said. The plan, which charges ETF firms for transaction data, drew initial resistance from some large fund providers, including BlackRock Inc., and the firm lowered fees in response, said the people, who declined to be named because the information is private.
The move by Morgan Stanley’s wealth management unit, which manages more than $2 trillion in client assets, reflects an effort on Wall Street to bolster brokerage revenue as investors flee expensive actively managed funds for cheaper passive products like index funds. It also poses a challenge to the burgeoning ETF industry, which has thrived by offering low-cost funds.
“If there is any degree of success I wouldn’t be surprised if others swoop in to follow suit,” Ben Johnson, director of global ETF research at Morningstar Inc., said in an interview.
Bruce Dunbar, a spokesman at Morgan Stanley, declined to comment.
Big Player
Morgan Stanley’s wealth management business is focusing on payments from issuers as investors pour money into the sector and new ETFs come to the market almost daily. The funds attracted $286 billion in the past year and have taken in about $700 billion during the past three years, according to data compiled by Bloomberg.
At the same time, ETF issuers know that success means having the broadest distribution -- and Morgan Stanley is a juggernaut. It had more than 15,700 financial advisers at the end of last year and managed $877 billion in fee-based accounts.
Yet the low-cost of ETFs makes it a tough business for both brokerages and issuers to squeeze revenue from. Over half of the money that flowed into ETFs in the past year went to products with an average fee of 0.09 percent or less, according to an analysis from Bloomberg Intelligence.
Against this backdrop, Morgan Stanley’s wealth management business, while thriving, reported a 10 percent decline in fourth-quarter transactional revenue, to $774 million, in part because of lower commissions. The unit reported record net revenue of $4 billion for the period driven in part by gains in asset management fees.