Vanguard Cuts Minimums (Hence, Costs) for 38 Index Funds December 3, 2018 Adviser Fund Update Print 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 StockA financial instrument giving the holder a proportion of the ownership and earnings of a company. Market Index and the $431.5 billion 500 Index, as well as the $199.3 billion Total BondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. 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) plansA 401(k) plan is a retirement account that a company sets up on behalf of its employees. Both the participant and the employer can contribute to the account. There are two types of 401(k)s, traditional and Roth. Income invested in traditional 401(k)s isn’t taxed while it’s invested, but is taxed when it’s withdrawn. Income invested in a Roth 401(k) is taxed before it’s invested, but no tax is paid when it is withdrawn., 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 DividendA cash payment to investors who own stock in the company. YieldYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. 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 equityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. 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 is a full service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994, and have more than 3,500 clients across the country and over $6 billion in assets under management. Our portfolios encompass actively managed funds, ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index., socially responsible investments and tactical asset allocation strategies, with particular expertise in Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. Our minimum account size is $350,000. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868. 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