Vanguard vs. Fidelity: What Today’s Investor Needs to Know - Adviser Investments

Vanguard vs. Fidelity: What Today’s Investor Needs to Know

December 3, 2019

Episode Description
Featuring Dan Wiener and Jim Lowell

Vanguard’s and Fidelity’s growth and evolution over the past 25 years have been astounding to watch, and we’ve been paying close attention all the while. Getting data on their managers and services was once like squeezing water from a stone, but today’s investors are faced with so many funds and so much information that it’s easy to be overwhelmed. That’s where we come in.

In this exclusive conversation, Chairman Dan Wiener and Chief Investment Officer Jim Lowell—who have spent decades covering Vanguard (Wiener) and Fidelity (Lowell) in their independent newsletters—dissolve the myths, cut through the spin and look at what’s ahead for these two fund titans.

Among the discussion topics:

  • Is Fidelity just a growth shop? Vanguard a mere conservative indexer?
  • What Morningstar’s fund rating system doesn’t tell you
  • The possibilities afforded by each firm’s deep international bench
  • How are Vanguard and Fidelity reacting to the rise of roboadvisers?

It’s never too soon to become an informed investor. To learn more, listen to the podcast by clicking the button above.

And for more information, click here for our free, no-obligation special report, Fidelity vs. Vanguard: Which Is Right for You?

Episode Transcript

Dan Wiener:
Hello, this is Dan Wiener. I’m chairman of Adviser Investments, and I’m here for another Adviser You Can Talk To Podcast with my colleague and partner Jim Lowell. Jim is probably one of the leading experts on Fidelity mutual funds in the United States and I come at this with a little bit of expertise about Vanguard, and we thought it would be fun to sort of play the Vanguard against Fidelity game here. There are a lot of misconceptions, I think, out in the marketplace about what makes Fidelity great and what makes Vanguard great, and we’re going to try to dissolve some of those myths, right?

Jim Lowell:
Sure. Yeah. When we were starting out, Dan, we had to be Kremlinologists scouring for all kinds of data related to the Fidelity/Vanguard funds that we track and invest in. It was really a lot of legwork. These days, it’s not so much the legwork, it’s the overwhelming amount of information that floods into your inbox or is accessible through either Vanguard or Fidelity’s excellent websites that overwhelm investors and readers alike.

Dan Wiener:
But it’s just that flood that requires that you and I spend so much time doing it because neither Fidelity nor Vanguard is ever going to tell you that one of their funds is good and the other is bad, or that this fund is perfect and the other is not. I mean, we always like to say that they are never going to call one of their children smarter or prettier than the other.

Jim Lowell:
They’ll never tell you which fund to sell.

Dan Wiener:
Exactly.

Jim Lowell:
We absolutely do. They also will never take out a full-page advertisement in The New York Times marketing a one-star fund.

Dan Wiener:
Well, right, they’re not even going to talk about it. But when we’ve had conversations about Vanguard and Fidelity, I think the biggest misnomer, if you will, about the two is that Fidelity is a growth shop and Vanguard’s a conservative index shop and never the twain shall meet.

Jim Lowell:
Correct. There really used to only be, in investors’ minds, three firms: One, Fidelity for growth funds; two, Vanguard for low-cost index funds; three, PIMCO for bond funds. Well, Bill Gross blew up PIMCO, so now it’s really just about Fidelity and Vanguard. And one of the things that we know so well is that Fidelity offers a broad range of equally low-cost index funds. And Vanguard, I think the biggest surprise is that they have some of the best active managers on the planet.

Dan Wiener:
It’s kind of stunning that people think of Vanguard as an index shop. When I think of Vanguard as having some of the best actively managed funds—although several of them are closed now because they are such good active managers—but some of the best active funds and best managers in the business. I mean, they are great compliment to some of those great managers that you’ve identified at Fidelity.

Jim Lowell:
When we put the two together, two oars in the water rowing straight, rowing in the same direction, we know that we’re delivering to our clients the best of both worlds. And one of the things that we like most about the firms, Fidelity and Vanguard, is their own focus on low-cost, excellent products, all wrapped around a vehicle that communicates reasonably well about their products. Although we have spent the last few decades making sure that we’re not just communicating about the products, but really teaching, educating our clients about what they’re invested in and why we think they should be.

Dan Wiener:
But also, this is not all rainbows and unicorns. There are some bugs in the system here. I think if you’ve been following the news at all lately, you know that one of the big bugs in the system has Vanguard’s technology. They have not been able to keep up with the enormous rapid growth that they’ve experienced as people have come to believe that their low-cost mantra is the be all, end all for investing.

Dan Wiener:
I’m a big Vanguard fan. We own quite a lot of Vanguard funds at Adviser Investments for ourselves and for our clients. That being said, their service component suffers from the fact that they are so low-cost. I mean, you can’t keep wringing costs out of the system and not have the system suffer.

Jim Lowell:
And Fidelity, just the opposite. They spend literally a billion or more dollars a year on their proprietary technology. Abby Johnson, who runs Fidelity, is a technologist at heart. Fidelity’s always been on the leading edge of all kinds of new technology. But where Fidelity has hit difficulties with its own exponential growth has been in, I think, not being able to quickly fire enough underperforming managers. There’s plenty of deadwood at Fidelity that they simply are not willing to jettison, so part of our job is to make sure that we’re not investing in the dead wood. The good news is that there literally are dozens and dozens of top-tier managers at both Fidelity and Vanguard.

Dan Wiener:
Yeah, it’s interesting. Vanguard’s got a lot of underperforming managers as well, but I ascribe some of that to the fact that they may be focused more on indexing and also making sure that their active funds don’t differ too much from the indexes. And what they’ve done, as you know, Jim, is they’ve added managers onto funds. As the funds have gotten bigger, they’ve added more managers. They haven’t either closed the fund. You could close the funds, but they prefer not to. They add on more managers, and it’s the old thing about putting too many chefs in the kitchen. You’re going to end up with a pretty messy and not very tasty meal.

Jim Lowell:
You spoil the broth, or another analogy is if you have 12 sandbags around your hot air balloon, you’re never going to take off.

Dan Wiener:
Well, that’s the problem.

Jim Lowell:
And we look at manager track record, so not Morningstar star rating systems, which are based on fund performance history. But we really look at each individual manager’s track record through bull/bear and different markets. We look at whether or not they’ve outperformed not just their benchmark but their peer group with what level of consistency, with what level of risk. We run our portfolios in a profoundly risk-aware manner. One of the great attributes of both Fidelity and Vanguard is that they’re not just equity shops, they have phenomenal fixed-income offerings. And also, they enable us to go global with a high degree of confidence given the stellar nature of their international and emerging-market bench.

Dan Wiener:
I’m sitting over here on the Vanguard side of the table and what’s Vanguard’s number one marketing gimmick or oar the water and that is their low cost. While we know we’ve been in a big fee war, costs are being driven down to almost zero and sometimes even to zero.

Jim Lowell:
That’s right. Fidelity has got a couple of zero cost index products as well.

Dan Wiener:
So is Vanguard the low-cost leader?

Jim Lowell:
I would say, the real benefit comes to us and comes to investors in both Fidelity of Vanguard products because the cost continues to go down. Fidelity being privately held, well-capitalized and a diversified, financial conglomerate can afford to win any race to the bottom; and so, Vanguard has to be responsive for all the obvious business reasons and market-share-related reasons. But ultimately, I’m not going to stand in their way because we benefit.

Dan Wiener:
We do benefit. The entire industry is watching this thing and they’re watching the costs go down, down, down and–

Jim Lowell:
And they’ve got to be getting more and more concerned over their own bottom line. But when it comes to Fidelity and Vanguard, they will figure out a way to both continue to deliver what they do so well, but do it at lower costs.

Dan Wiener:
Well, but you’re seeing a changing complexion of the business. At least I’m the Vanguard-watcher, so I see what’s going on there. Vanguard is introducing an almost drop-dead cheap robo-adviser that is geared to millennials, and I’m referring it as a gateway drug. It’s a way of getting the millennials into the Vanguard fold. They will get them eventually to move from working only with a robo or with a computer to build portfolios to working with their pseudo-financial planning/investment advisory service where they will pay more money to get that kind of service. And then I’m not sure where it goes from there, but they are reaching deep because they’re running out of the ability to make enough money on these low-cost funds.

Jim Lowell:
And Fidelity is doing much the same thing for different reasons. I’d say Fidelity is doing it for market share and also looking at the next generation of wealth the coming down the pipeline. But a point on those rock-bottom-cost robo-advisers at Fidelity, and you could tell us if it’s true at Vanguard as well, is that you get what you pay for, which means you’re not getting a lot. I would say you’re getting next to nothing. And my biggest fear is that individuals who begin in those programs, so they’ve raised their hands and say they’re interested investing for their financial future, smart money move, get turned off by investing for their financial future by the disservices that I think just generic robo models will deliver to them.

Dan Wiener:
The push is definitely on by these companies, certainly by Vanguard, to get folks into the system where they will pay Vanguard more money to essentially have their money managed pretty much the way you could do it with some of their funds of funds. I mean, the robo is essentially their target retirement funds except that you’re paying a fee on top of it to get into these things.

Dan Wiener:
And I literally today got a call from a $3 million Vanguard investor, who was part of their flagship program, whose flagship adviser left or was promoted. He’s not sure which, and he has not been given another adviser and it’s been three or four months. And he’s called asking for the name of his new adviser and essentially he was sent a two or three sentence email saying, “We’re working on getting you an adviser, but we really can’t tell you how long it’s going to be before we’ll find one for you.” And his reaction and response, and mine as well, is Vanguard really wants you to pay them some more money to go into one of their financial planning or wealth management arms so that they can afford to give you an adviser.

Jim Lowell:
I would just back up and say that if you have the time to write a letter that says we can’t tell you what time we’re going to assign you an adviser then you have the time to find the adviser, so that client is clearly underserved.

Dan Wiener:
Totally. My recommendation was go over to Fidelity.

Jim Lowell:
Yeah, there you go.

Dan Wiener:
And I’m supposed to be the Vanguard guy. Jim, fun discussion about Vanguard and Fidelity. I’m going to let you sign off since I signed on.

Jim Lowell:
This is Jim Lowell, chief investment officer at Adviser Investments; Dan Wiener, chairman of Adviser Investments. Thank you to you for listening to The Adviser You Can Talk To Podcast.

Jim Lowell:
If you enjoyed this conversation, please subscribe and review our show. You can also check us out at www.adviserinvestments.com/podcasts. Your feedback is always welcome. And if you have any questions or topics you’d like us to explore, please email us at info@adviserinvestments.com.

Dan Wiener:
Thanks, Jim.

Jim Lowell:
Thanks, Dan.

Podcast released on December 3, 2019. This podcast is for informational purposes only. It is not intended as financial, legal, tax or insurance advice even though these topics may be discussed. Information and events addressed in this podcast, as well as the job titles, job functions and employment of the podcast’s participants with respect to Adviser Investments, LLC may have changed since this podcast was released. For more information on each individual featured in this podcast, see the Our People section of our website.

The Adviser You Can Talk To Podcast is a trademark of Adviser Investments, LLC. Registration pending.

© 2020 Adviser Investments, LLC. All Rights Reserved.

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Part of our job is making sure we’re not investing in the dead wood. The good news is there are literally dozens of top-tier managers at both Fidelity and Vanguard.


Jim Lowell

Chief Investment Officer

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It’s never too soon to become a more informed investor. In these exclusive podcasts from Adviser Investments, Chairman Dan Wiener and our team of experienced investment professionals discuss timely and informative topics for investors like you.

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