By Elizabeth Dilts and Trevor Hunnicutt
NEW YORK (Reuters) - Morgan Stanley (NYSE:MS), the largest U.S. brokerage by salesforce, said on Wednesday it is dropping mutual funds from Vanguard Group, the largest U.S. mutual fund firm.
Morgan Stanley will not force clients to liquidate any holdings they currently have in Vanguard mutual funds. But starting on Monday, advisers cannot sell any new mutual funds from Vanguard, Morgan Stanley spokeswoman Christy Jockle said in an email.
Jockle said Morgan Stanley's goal was to close out under-performing and less popular funds. The client assets held in Vanguard mutual funds represents a small percentage of all client assets in mutual fund investments, she said.
Clients can add money to their existing Vanguard investments through the first quarter of 2018.
Morgan Stanley, which employs more than 15,000 brokers, announced last month that it would reduce the mutual funds it offers by 25 percent, to 2,300 funds. The decision to drop Vanguard funds specifically was announced earlier Wednesday by the investment news website AdvisorHub.
Morgan Stanley will continue to offer Vanguard exchange-traded funds.
Known for pioneering index funds like its Vanguard 500 Index Fund, the Pennsylvania-based firm has attracted clients with its low-cost approach.
Over the last year, Vanguard attracted $342 billion in net inflows, mostly into its passively managed index funds and exchange-traded funds.
The firm attributes its low costs partly to not paying wealth management firms for the distribution of its funds, something its rivals do.
Vanguard spokeswoman Emily Farrell said that while it was "unfortunate" that Morgan Stanley advisers will no access Vanguard's mutual funds, the popularity of its ETFs continues to increase.
"We will definitely continue to see growth," Farrell said.