As a longtime Fidelity customer (and former writer for its web site), I’ve long appreciated the company’s customer service and wide array of investment choices. But when I tried to buy the Admiral class shares of a Vanguard mutual fund recently, I was politely told that it wasn’t available—no matter how good a customer I was.
Vanguard, it turns out, is keeping some of its lowest-cost products off the shelves of fund “supermarkets” like Fidelity and Schwab. While investors can purchase most Vanguard mutual funds at these firms, they will have to buy directly from Vanguard if they want the lowest-cost Admiral shares of its actively managed funds.
The situation is an odd one, and it’s a byproduct of changes that Vanguard made last year in its dual-class structure of mutual funds. Vanguard has long had two classes of shares: Investor and Admiral. Investor shares have lower investment minimums and higher expense ratios than Admiral. But Vanguard harmonized the two classes for its index funds last year: It lowered investment minimums for Admiral to $3,000 from $10,000, and started replacing Investor shares with the Admiral class. That, in turn, opened up the Admiral class of index funds to ownership and sales through third-party brokers like Fidelity and Schwab.
But Vanguard left its dual class structure in place for its actively managed funds, reserving the Admiral shares for purchase exclusively from Vanguard. Even if you meet the investment minimums, starting at $50,000, you’ll have to buy directly from Vanguard if you’re a “retail” customer, though advisers can gain access to Admiral through accounts that are custodied elsewhere.
The difference in annual fees can add up. Vanguard High-Yield Tax-Exempt Fund (ticker: VWAHX), for example, is an actively managed municipal bond fund. It has an expense ratio of 0.17% in the Investor class versus 0.09% for Admiral. If you were to invest the minimum $50,000, the extra cost in the Investor class would be $40 a year.
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That isn’t much in additional expenses, but it adds up for larger investments. Plow $300,000 into the Investor class of the fund and the extra cost jumps to $240 per year. For a $1 million portfolio, the additional expense would be $800 more in the Investor class. That doesn’t assume any capital gains or reinvested dividends that would grow the account and magnify the effect of saving a few hundred dollars in annual fees (something Vanguard stresses in much of its marketing materials and fund literature).
Vanguard, of course, has done more than any other fund company to exert downward pressure on fees. Vanguard says it runs funds “at cost,” and it routinely reduces fees when its own costs decline, pressuring other companies to lower fees to stay competitive.
But Vanguard is facing more competition in its core index-fund business. Expense ratios industry-wide have been declining for years. Several firms now sell index funds that beat Vanguard’s prices, including Fidelity’s new suite of zero-fee index mutual funds.
Moreover, Vanguard is still in the business of gathering assets, and it’s trying 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 its low-cost Admiral shares for active funds is one way to prevent firms like Fidelity or Schwab from poaching client assets.
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“Vanguard is saying, ‘Why should we offer our best priced item on someone else’s shelf when we want investors to stay with us?’” Daniel Wiener, editor of monthly newsletter The Independent Adviser for Vanguard Investors, tells Barron’s.
Brokerage firms, for their part, have scant incentive to make it any easier to buy Vanguard products. Not only does Vanguard compete against their funds, but Vanguard has never paid for fund distribution. Fidelity and other brokerage firms have long chafed at Vanguard’s refusal to pay for distribution. Some fund companies pay more than 0.15% of fund assets to be on Fidelity’s platform, for instance. Those fees are increasingly important to brokerage firms as expense ratios decline and investors migrate out of actively managed funds to low-cost index products.
“Vanguard doesn’t compensate us for the services we provide,” a Fidelity spokeswoman told Barron’s. “That’s why there’s a higher transaction fee for its funds,” she added, referring to the $75 fee that Fidelity charges to buy a Vanguard fund, well above its normal $49.95 rate.
Vanguard, for its part, appears unlikely to budge on making its Admiral-class active funds available at other firms. “There are no plans to do so at this time,” a Vanguard spokeswoman tells Barron’s. And the firm is plowing ahead with new actively managed funds, including one focused on commodities and another on stocks that screen well for environmental, social, and governance factors.
Both are likely to have Admiral shares that are available exclusively from Vanguard.
Write to Daren Fonda at daren.fonda@barrons.com
https://www.barrons.com/articles/vanguard-lowest-cost-funds-fidelity-retirement-schwab-51556315451
2019-04-28 11:00:00Z
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