Advisors working at Morgan Stanley face more than just protocol-related issues. The wirehouse is reportedly planning to cut around 600 funds from its platform. That culling comes after last May's elimination of an estimated 700 investment-related products, including all funds from Vanguard.

"The wirehouses in general -- it's not just Morgan Stanley -- have built up all these products on their platforms, most of which probably aren't seeing much action at all," says Mark McAdams, who left Morgan Stanley nearly a year ago to co-found Houston-based Icon Wealth Partners.

The chief investment officer at the independent RIA, which manages about $650 million, is concerned such cutbacks could wind up being "a real problem" for advisors who are "trying to provide the best investment choices" for their clients. "There are some very good asset managers who just aren't willing to pay to be on wirehouse platforms," McAdams says.

No specifics are being made publicly available, according to an earlier report by Ignites, a sister publication of Financial Advisor IQ. But unnamed sources tell reporter Bradley Saacks that impacted asset managers are being notified and more details are expected to be announced to the brokerage's 15,500-plus advisors by March.

In response to questions posed by FA-IQ on Tuesday, Morgan Stanley responded that its latest reductions were part of an ongoing streamlining effort. "For the best interest of our clients, we are eliminating funds that have underperformed or have been unsuccessful in raising assets on our platform," the company writes in an email.

The cuts will also result in "expanding the number of strategies that are covered by the Global Investment Manager Analysis team," Morgan Stanley says.

Indeed, the wirehouse is listed as currently offering more than 2,000 different funds. "We continue to offer funds from a diverse set of managers across all product categories," Morgan Stanley adds.

The firm also claims it isn't targeting "a specific number of mutual fund products" to be eliminated. Morgan Stanley says its objectives remain the same: to let advisors "create portfolios to address the full range of investment objectives."

Not addressed by Morgan Stanley was a question about whether unprofitable revenue sharing agreements are part of the fund-cutting equation.

As noted in an earlier FA-IQ report, analysts see ripples spreading throughout the industry after plans became public that Ameriprise was moving to limit wholesalers at Franklin Templeton, Pimco and AB from approaching the broker-dealer's network of advisors.

Those moves came after Morgan Stanley took Vanguard and others off its funds platform. Such action was credited by Vanguard to its unwillingness to pay the brokerage for distribution.

"Revenue sharing is a big deal -- smaller firms that can't afford to pay or aren't willing to pay to be highlighted on a wirehouse's platform are often overlooked from the advisor's point of view," Icon's McAdams says. "That can be an issue since a lot of the smaller funds are still viable alternatives for clients."

Matt Marsh, who helps oversee implementation of the Dynasty Financial Partners' investment platform used by more than 200 independent advisors, agrees.

For more than a decade he did much the same work at Morgan Stanley. In mid-2016, Marsh left to join Dynasty, which provides services for broker-dealer teams moving to independence. "The culling of asset management strategies at Morgan Stanley started before I left," he says.

Some of those cuts were taken to reduce "low-hanging fruit" and poor performers, Marsh notes. The rising popularity of ETFs, he says, also was thought to be fueling such reductions in actively managed mutual funds and separately managed account managers.

Still, he believes revenue sharing agreements are "so ingrained in how wirehouses form outside partnerships and do business" that it's highly likely such deals are part of deciding which managers to cut and which to let stay.

"What I've seen happening in the wirehouse business is that a greater number of advisors are becoming disenchanted with managers in the home office deciding which funds are most appropriate for their clients," Marsh says.

The latest cuts to Morgan Stanley's investment platform aren't likely to ease the minds of advisors who are concerned about such conflicts of interest, predicts Andrew Mies, chief investment officer at 6 Meridian in Wichita, Kan.

In late 2016, he joined six other ex-Morgan Stanley advisors to form the independent RIA which now manages more than $2 billion. "We told our clients that we really wanted greater flexibility in choosing funds and best-of-breed investment solutions," Mies says.

Since they've left Morgan Stanley, 6 Meridian's advisors say they've cut several deals with asset managers who weren't part of the wirehouse's platform. "A big reason why we left was limitations Morgan Stanley placed on us over developing our own investment strategies," Mies says.

Creation of a new separately managed account built around a hedged equity theme by his team wasn't allowed because "it didn't fit squarely in Morgan Stanley's box," according to Mies. Also, he and his colleagues wanted to start a fund-of-funds tailored to the specific needs of many of their largest clients.

Andrew Mies
Andrew Mies

In the way Mies envisioned such funds, he says investment diversification benefits would be greater and costs would be much less for clients than what was being offered through Morgan Stanley's platform.

Now, 6 Meridian is forging ahead developing such strategies on its own.

"Every time we see one of these headlines -- whether it's kicking Vanguard out, moving away from the industry protocol or constantly changing fund lineups and compensation models -- it just reinforces the logic and timing of our decision to leave Morgan Stanley," Mies says.