Fidelity and Schwab customers cannot get Vanguard's cheapest money
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As a long-standing Fidelity customer (and former author of his site), I have long appreciated the company's customer service and a wide range of investment choices. But when I tried to buy the admiral class shares in a vanguard fund recently, I was politely told that it was not available – no matter how good a customer I was.
Vanguard, proves, holds some of its low-cost products from the shelves of the "supermarkets" fund like Fidelity and Schwab. While investors can buy most Vanguard funds on these companies, they must purchase directly from Vanguard if they want the lowest cost of the Admiral shares in their actively managed funds.
The situation is a strange one, and it is a by-product of changes that the Vanguard made last year in its two-class structure of mutual funds. Vanguard has long had two classes of shares: Investor and Admiral. Investment shares have lower investment minimum and higher expense ratios than admiral. But Vanguard harmonized the two classes for the index funds last year: The admiral lowered investment minimum to $ 3,000 from $ 10,000, and began replacing Investor shares with the Admiral class. It again opened the Admiral class of index funds for ownership and sales through third-party brokers such as Fidelity and Schwab.
But Vanguard left his dual class structure in place for his actively managed funds, and reserved the admiral shares for purchase exclusively from Vanguard. Even if you meet the investment minimum, from $ 50,000, you must purchase directly from Vanguard if you are a "retail" customer, but advisors can access admiral through accounts placed elsewhere.
The difference in annual fee can add up.
Vanguard High-Yield Tax-Exempt Fund
(ticker: VWAHX), for example, is an actively managed municipal bond fund. It has a spending ratio of 0.17% in the Investor class versus 0.09% for admiral. If you were to invest a minimum of $ 50,000, the additional cost of the Investor class would be $ 40 a year.
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There is not much in extra expenses, but it adds up for larger investments. Plow $ 300,000 in the Investor class of the fund and the additional cost jumps to $ 240 per year. For a $ 1 million portfolio, the additional expense will be $ 800 more in the Investor class. It does not assume any gains or reinvested dividends that will increase the account and increase the impact of saving a few hundred dollars in annual fees (which Vanguard emphasizes in much of the marketing materials and fund literature).
Of course, Vanguard has done more than any other fund company to exert downward pressure on taxes. Vanguard says it is running funds "to diet" and it routinely reduces fee when its own costs fall and pushes other companies to lower fees to remain competitive.
But Vanguard faces more competition in its core index fund business. Expenditure conditions worldwide have been declining for many years. Several companies are now selling index funds that beat Vanguard's prices, including Fidelity's new zero fund index fund package.
Furthermore, Vanguard is still collaborating to collect assets, and it tries to keep investors in-house for its services, which have expanded to include more retirement and advisory products, along with more actively managed funds. Maintaining the Exclusive Rights to Sell Their Cheap Active Admiral Stocks is a way to prevent companies such as Fidelity or Schwab from supporting client funds.
"Vanguard says," Why should we offer our best priced goods on the shelf of others when we want investors to stay with us? "Daniel Wiener, editor of monthly newsletter The independent consultant for Vanguard Investors, tells Barrons .
For example, brokerage firms have a slow incentive to make it easier to buy Vanguard products. Vanguard does not only compete against its funds, but Vanguard has never paid for fund allocation. Fidelity and other brokerage firms have long wondered about Vangard's refusal to pay for distribution. For example, some fund companies pay more than 0.15% of the fund assets to the Fidelity platform. These fees are becoming increasingly important for brokerage firms as cost expenditures fall, and investors migrate out of actively managed funds into low price index products.
"Vanguard does not compensate us for the services we offer," a Fidelity spokesman told Barron is . "Therefore, there is a higher transaction fee for their funds," she added, referring to the $ 75 fee that Fidelity takes on buying a Vanguard fund, well above its normal $ 49.95 rate.
Vanguard, for his part, looks as though it is unlikely that he will make active funds from the admiral class available to other companies. "There are no plans to do so at this time," says a Vanguard spokeswoman Barrons . And the company plows ahead with new actively managed funds, including a focus on goods and another on stocks that differ. good for environmental, social and governance factors.
Both probably have Admiral shares available exclusively from Vanguard
Write to Daren Fonda at daren.fonda@barrons.com
