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As a long-time client of Fidelity (and former editor of his website), I have long enjoyed the company's customer service and its wide range of investment choices. But when I recently tried to buy the Admiral class shares of a Vanguard mutual fund, I was politely told that these funds were not available, no matter who my client was.
It turns out that Vanguard keeps some of its least expensive products among the "supermarkets" of funds such as Fidelity and Schwab. Although investors may purchase most of the Vanguard Mutual Funds from these companies, they will need to purchase directly from Vanguard if they wish to acquire the least expensive Admiral shares of its actively managed funds.
The situation is odd and is a by-product of the changes Vanguard made last year to its two-class mutual fund structure. Vanguard has a long history of two share classes: Investor and Admiral. Investor shares have lower investment minima and higher expense ratios than Admiral. But Vanguard harmonized the two classes for its index funds last year: it lowered the minimum investment for Admiral from $ 3,000 to $ 3,000, and began replacing investor shares with the Admiral category. This then opened the Admiral index fund class to ownership and sale through third party brokers such as Fidelity and Schwab.
But Vanguard has left its two-class structure in place for its actively managed funds, reserving Admiral shares for Vanguard's exclusive purchase. Even if you reach the minimum investment, starting at $ 50,000, you will need to buy directly from Vanguard if you are a "mainstream" customer, although advisors can access Admiral through managed accounts elsewhere.
The difference in annual fees can be added up.
Vanguard High Yield Tax Exempt Fund
(symbol: VWAHX), for example, is an actively managed municipal bond fund. It presents an expense ratio of 0.17% in the investor category against 0.09% for the Admiral. If you invest a minimum of $ 50,000, the additional cost in the investor class would be $ 40 a year.
Read our recent cover story: Fidelity is flourishing. Here's what you need to stay prosperous.
This does not represent a lot of extra expenses, but it represents larger investments. Invest $ 300,000 in the Investors category of the fund and the additional cost rises to $ 240 per year. For a portfolio of $ 1 million, the additional expense would be $ 800 more in the investor category. This does not imply capital gains or reinvested dividends that would increase the account and magnify the effect of saving a few hundred dollars in annual fees (which Vanguard insists on in most of its marketing materials and funds).
Of course, Vanguard has done more than any other fund company to put downward pressure on fees. Vanguard says it manages "cost-price" funds and that it systematically cuts costs when its own costs go down, urging other companies to cut costs to stay competitive.
But Vanguard faces increased competition in its core index fund business. Expenditure ratios in the industry have been declining for years. Several companies are now selling index funds that exceed Vanguard's prices, including Fidelity's new range of zero-cost index mutual funds.
In addition, Vanguard is still gathering assets and trying to keep investors in-house for its services, which have grown to include more retirement and advisory products, as well as more actively managed funds. Maintaining the exclusive rights to sell low-cost Admiral shares for active funds is one way to prevent companies like Fidelity or Schwab from looting their clients' assets.
"Vanguard says," Why should we offer our article at the best price on someone 's shelf when we want investors to stay with us? "," Said Daniel Wiener, editor of The Independent Adviser for Vanguard Investors monthly newsletter. Barron.
Brokerage companies, meanwhile, have little incentive to facilitate the purchase of Vanguard products. Not only does Vanguard compete with their funds, but Vanguard has never paid for the distribution of funds. Fidelity and other brokerages have long regretted Vanguard's refusal to pay for the distribution. Some fund companies, for example, pay more than 0.15% of the fund's assets to be on the Fidelity platform. These fees are becoming increasingly important for brokerage firms as expense ratios decline and investors migrate from actively managed funds to low-cost index products.
"Vanguard does not compensate us for the services we provide," said a Fidelity spokeswoman Barron. "That's why the transaction fees on her funds are higher," she added, citing Fidelity's $ 75 purchase of a Vanguard fund, well above its normal rate of return. $ 49.95.
Vanguard, for its part, seems unwilling to give up its active Admiral-type funds available in other companies. "It's not planned for the moment," said a spokeswoman for Vanguard. Barron. In addition, the Company is moving forward with new actively managed funds, including a commodity-focused fund and another one focused on equities that address environmental, social and governance considerations.
Both are likely to have Admiral shares that are available exclusively to Vanguard.
Write to Daren Fonda at [email protected]
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