Vanguard Cuts Minimums (Hence, Costs) for 38 Index Funds - Adviser Investments

Vanguard Cuts Minimums (Hence, Costs) for 38 Index Funds

December 3, 2018

Vanguard Fires Back in Index-Fund Fee Wars: Higher Investment Minimum Eliminated

The fee wars rage on! Since Fidelity launched the first index funds with zero expense ratios last August, we’ve been waiting to see how Vanguard would counter.

Now we know. As of November 19, the Malvern, Pa.-based fund giant lowered the minimum required investment for its Admiral share class (which feature lower fees than its entry-level Investor class) to $3,000 from $10,000 on 38 index funds.

Essentially, Vanguard is getting rid of the higher investment minimum on its lower-cost Admiral funds in direct response to Fidelity’s fee moves. Of course, that’s not how Vanguard is positioning it. According to them, it’s the latest in the firm’s continuing efforts to cut costs for investors. But to us, the optics are clear.

Depending on the fund, the lower minimums provide expense savings of 15% to 71% compared to costs on the Investor class shares. The 38 funds impacted include Vanguard’s $708.0 billion Total Stock Market Index and the $431.5 billion 500 Index, as well as the $199.3 billion Total Bond Market Index fund. All told, Vanguard says the move will save shareholders $71 million in aggregate.

Current shareholders of the higher-priced Investor class shares can exchange their holdings for Admiral shares; those who don’t will be automatically switched starting in April 2019.

But not all Investor class shareholders will reap this benefit. Retail investors in Vanguard’s Target Retirement and LifeStrategy funds-of-funds will be left out. These funds will keep using the more expensive Investor share classes. From Vanguard’s perspective, it makes business sense, even if it’s not shareholder friendly.

Why? Investors in individual index funds are more likely to shop around for the lowest possible costs. Investors in target-date funds are actively encouraged to have a set-it-and-forget-it mindset as the fund companies promise to manage their money all the way through retirement. That means there’s less incentive for Vanguard to cut costs in these funds, which are heavily used in 401(k) plans, since the assets are “stickier.”

In addition to the reduced minimums on existing Admiral share classes, Vanguard also filed paperwork with the Securities and Exchange Commission to launch Admiral shares of five funds already available as Investor class shares: FTSE Social Index, FTSE All-World ex-U.S. Small Cap Index, High Dividend Yield Index, Long-Term Bond Index Fund and Total World Stock Index.

Vanguard rolled out the lower-cost Admiral share class in 2000 as a way to reward investors who put larger sums of money into their funds. When they first opened, Admiral shares required a $250,000 investment. That’s been cut down quite a bit over the years.

These lower minimums only apply to Vanguard’s index funds; to get the Admiral-class price break in its actively managed funds, investors still face a $50,000 minimum. (Note that Adviser Investments always seeks the most cost beneficial share class available to each client, including Vanguard’s Admiral shares where applicable.)

Vanguard is giving up a healthy chunk of fees. But rather than looking at this as a cost or lost fees, we see it as a valuable move to cement its reputation as a low-cost leader. And as always, when the fund titans battle it out over fees, individual shareholders are the winners.

Fidelity Emphasizes Technology with Steve Neff Appointment

On November 17, Fidelity announced that Steve Neff would succeed Charlie Morrison as president of asset management when Morrison retires at the end of the year.

Neff ascends to the position with a strong tech background. When selected for promotion, Neff was serving as head of technology and global services, where he chaired Fidelity’s chief information officer council and was responsible for the oversight, coordination and execution of the firm’s technology functions and global business services.

Fidelity CEO Abigail Johnson wrote to employees that “it’s an opportune time for Steve to lead Asset Management, as technology is becoming increasingly important in our efforts to deliver outstanding investment performance and solutions for our customers.”

Neff joined Fidelity in 1996 after having worked in a variety of technology leadership roles with Salomon Brothers in New York and London. His prior positions at Fidelity include vice president of technology infrastructure, vice president of equity investment management systems, senior vice president of equity trading systems and senior vice president of technology support and operations.

To assure a smooth transition, Neff is working closely with Morrison through year-end. We do not expect that investors in the firm’s funds will see any changes as a result of this move (and, based on Neff’s background, may even see further technological advances). Fidelity’s track record of successful succession planning suggests that business will go on without a hitch once Morrison has left the building.

While the selection of a tech specialist to head the asset management division may seem a bit unorthodox, to us it indicates the premium Johnson places on technology as a key competitive edge for the fund giant.

We’ve long held that Fidelity is a technology company wrapped in an investment cloak—it seems now that the cloak has come off. In terms of how Fidelity values technology as the driver for all of its investment vehicles, the future is now in the form of its new asset management chief. We look forward to seeing how Neff advances the cause for our clients and the industry.

About Adviser Investments
Adviser Investments operates as an independent, professional wealth management firm with expertise in Fidelity and Vanguard funds, actively managed mutual funds, ETFs, fixed-income investing, tactical strategies and financial planning. Our investment professionals focus on helping individual investors, trusts, foundations and institutions meet their investment goals. Our minimum account size is $350,000. For the sixth consecutive year, Adviser Investments was named to Barron’s list of the top 100 independent financial advisers nationwide and its list of the top advisory firms in Massachusetts in 2018. We have also been recognized on the Financial Times 300 Top Registered Investment Advisers list in 2014, 2015, 2016 and 2018.

For more information, please visit www.adviserinvestments.com or call 800-492-6868.

Disclaimer: This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations, personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

The Barron’s rankings consider factors such as assets under management, revenue produced for the firm, regulatory record, quality of practice and philanthropic work. This award does not consider client experience and is not indicative of future performance.

Editors at the Financial Times bestowed “elite” status on 300 firms in the U.S., as determined by assets under management, asset growth, longevity, compliance record, industry certifications and online accessibility.

© 2018 Adviser Investments, LLC. All Rights Reserved.

85 Wells Avenue, Suite 109 Newton, MA, 02459

info@adviserinvestments.com 1.800.492.6868

Adviser Investments' logo is a registered trademark of Adviser Investments, LLC.