It’s the second largest asset manager in the world with over $4.5 trillion under management and it collected the most inflows among all U.S. asset managers in 2017, but Vanguard is not universally loved.
Morgan Stanley dropped new sales of Vanguard mutual funds from its platform last May, and TD Ameritrade removed Vanguard ETFs when it expanded its no-fee ETF platform in October. And recently Fidelity, the largest recordkeeper for defined contribution retirement funds, started charging new 401(k) plan clients with less than $20 million in assets an additional 5 basis points on Vanguard assets. The fee is levied on plan sponsors, not plan participants.
“We’re seeing competitive pushback against Vanguard,” said Morningstar fund analyst Kevin McDevitt. He doesn’t see a big impact on Vanguard currently but notes there could be one down the road. “It will be interesting to see if other firms join in.”
The issue behind the pushback is Vanguard’s refusal to pay revenue-sharing and other back-end fees that other funds are willing to pay, says Michael Kitces, director of wealth management for the Pinnacle Advisory Group and a co-founder of the XY Planning Network.
And this is happening against a backdrop of fee compression among asset managers and retirement fund recordkeepers, which puts more competitive pressure on firms in both industries.
Indeed, a Fidelity spokeswoman told ThinkAdvisor that the additional 5 basis-point fee levied on certain retirement plan accounts “is for administrative services that we are not compensated for. This fee is about being compensated for services rendered.” Vanguard is the only fund family that doesn’t compensate Fidelity for administrative services provided for retirement plans.
A spokesman for TD Ameritrade said Vanguard was removed from its roster of no-fee ETFs because Vanguard chose to leave the platform rather than provide “support” to the commission-free program, which was requested of all fund providers. The commission-free platform involves “significant expenses” for TD, the spokesman explained. Investors can still purchase Vanguard ETFs from TD Ameritrade, but they will have to pay a commission of $6.95.
A Vanguard spokeswoman declined to comment on the moves by Morgan Stanley and TD Ameritrade — “We generally don’t comment on our competitors” — but said the company shares “in the disappointment of plan sponsors impacted by [the] new fee from Fidelity,” adding that investors “have entrusted more of their retirement dollars to Vanguard than any other asset manager.”
Whether these moves will hurt Vanguard, which is the world’s largest mutual fund provider and second largest ETF provider, remains to be seen.
On the retirement front, some plan sponsors affected by Fidelity’s additional fee for Vanguard funds may find it “unreasonable” because they’re committed to using Vanguard funds while others won’t mind the fee because they’re focused on Fidelity and the services it provides, says Neal Epstein, a senior credit officer in Moody’s Financial Institutions Group.
And price may not be the deciding factor. “A lot of investors are moving to Vanguard because they trust Vanguard the most” and because they like Vanguard products, Stephen Tu, a senior analyst in the same Moody’s division. “It’s the only mutually owned asset manager there is … See how fast it’s growing.”
But Vanguard has more competition now than ever and is no longer always the lowest cost fund provider. Among S&P 500 funds, for example, Schwab charges just 3 basis points with no minimum and Fidelity charges 3.5 basis points with a $10,000 minimum. Admiral shares in Vanguard’s S&P 500 fund, which also require a $10,000 minimum, cost four basis points.
“Vanguard has its strengths and builts its reputation on low cost, but what happens over time if the alternatives are less costly with equivalent returns?” asks Peter Creedon, CEO of Crystal Brook Advisors in Mount Sinai, New York. “Who is easier to do business with and provides better services?”
It isn’t necessarily Vanguard, according to Fidelity. In addition to refusing to bear any administrative fees for 401(k) plans of which Fidelity serves as recordkeeper, Vanguard has additional operational requirements that differ from those of other fund families. Vanguard, for example, requires that plan trades be submitted one hour before the market closes, which, in turn, requires Fidelity and plan sponsors to cut off trades even earlier in order to analyze and review them before submitting them to Vanguard to minimize rejections.