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Fidelity Investments soon to jack up commissions on DFA and Vanguard Group mutual fund trades

At the same time, the Boston giant slashes commissions on 99% of the other mutual funds and, analysts say, may have declared war on Vanguard and Schwab in one move

Author Lisa Shidler December 5, 2013 at 8:18 PM
13 Comments
no description available
Jim Lowell: The big news here is that Fidelity and Vanguard still can't seem to figure out a way to play nice in our multi-trillion dollar sandbox.

RIA Custodians


Stephen Winks

Stephen Winks

December 4, 2013 — 10:13 PM

Wouldn’t it be interesting if DFA and Vanguard were to be the first fund companies to negotiate a full waiver of transactions cost for a fixed dollar fee in the millions with a few custodians, so RIAs utilizing their funds would minimize transactions cost in the client’s best interest as required for fiduciary standing. This would create a clear path of differentiation for advisors, usurping the brokerage channel, causing the entire industry to consciously make a choice of whether it serves the consumer’s best interest. John Vogel would again be a catalyst for much needed innovation.

All fund companies would have to respond in kind, thus resolving the industry’s principle conflict of interest of treating trade execution cost as a profit center counter to the consumers best interest rather than a cost center to be minimized in the client’s best interest.

This aligns the best interest of the consumer and the advisor. The broker would have to justify why they were a high cost low service provider counter to the consumer’s best interest. This also synchronizes regulatory policy and fiduciary standing.

SCW

Frederick Van Den Abbeel / TradePMR

Frederick Van Den Abbeel / TradePMR

December 4, 2013 — 10:49 PM

As a matter of perspective, the published public rate for mutual funds @ TradePMR is $19.95.

Aaron

Aaron

December 5, 2013 — 7:40 AM

At Trust Company of America, DFA, Vanguard and other mutual funds are exempt from any transaction costs. www.trustamerica.com

Dave Welling

Dave Welling

December 5, 2013 — 2:45 PM

Interesting article and issue. It’s difficult however to take one single element of pricing and compare custodians. Unlike advisors who are usually charging a simple, tiered AUM based fee custodians often have multiple pricing structures and ways of making money. Like any service one is getting you need to look at the all in costs to the investor as well as the all in revenue to the custodian who is performing a range of services that don’t have direct fees beyond just facilitating a trade. In the case of Vanguard and DFA it’s also worth noting that most advisors I know are not that active in placing trades in these funds as they may be in others so while the transaction cost may be higher on a single transaction there may be less transactions in a given time period.

Stephen Winks

Stephen Winks

December 5, 2013 — 3:44 PM

David Welling correctly makes the point that advice entails a broad range of services, but of those services, trade execution cost singularly inhibits the industry’s ability to support fiduciary standing essential to restoring the trust and confidence of the investing public. The industry has been unable reconcile that trade execution (to include spreads and opportunity cost) that it is the fiduciary duty of the advisor to minimize cost on behalf of the consumer in the consumer’s best interest. The consumer expects a prudent expert to act on their behalf as required by statute and 800 years of common law, not to abuse a position of trust to the benefit of the brokerage firm which employs the broker.

Importantly the common sense solution of doing the right thing as required by law, ethical considerations and professional standing which regulators find so complex is only complex from the perspective of a brokerage firm which by choice is unable to manage conflicts of interest.

This issue of trade execution being treated as a profit center has crippled the industry’s development the broad range of services necessary to support fiduciary standing an the professional standing of the broker. Thus fiduciary standing is controversial as brokerage regulators an brokerage firms have difficulty reconciling their regulatory imperative with the statutory duties required to support the best interest of the investing public. None of this is complex, as the facts speak for themselves.

Let DFA and Vanguard utilize the free market to effect trade execution cost as a cost center and over night, anyone who seeks professional standing, supports the consumer’s best interest and purports to act in the consumer’s best interest would have to use DSFA or Vanguard offerings. The rest of the industry would have to follow, and regulators (even FINRA) would suddenly by default actually support the best interests of the investing public as defined by statute. Problem solved by the free market—as it should. Regulators get it right by accident, 2,000 brokerage industry lobbyist and tens of million of campaign dollars are saved, 15% of gross industry revenues in compliance cost which defend that brokers are neither accountable or responsible for their recommendations would be deployed to actually develop the necessary resources to support expert advisory services in the consumer’s best interest.

What a positive transformation because two fund companies actually decided to do the right thing in support of the professional standing of the broker in the consumer’s best interest.

SCW

Tom Zimmerman

Tom Zimmerman

December 5, 2013 — 4:37 PM

Mr. Winks,

You seem to be missing several points. What Fidelity is making clear is that there are (at least) two pieces to this calculus: the (possibly minimal) cost of a trade, and the cost of custody. What if you view custody as a loss leader, and execution as a recoup of those losses? Instead you propose that both execution and custody should be cost centers. Should custodians operate as not-for-profits? I think not. I question whether you have much knowledge about the operations of the custodians that you seek to impale. If you do, you should know better.

Also, your custodian is not your fiduciary. That’s what RIA’s are paid for, right?

These two fund families that you are sainting are acting in their own best interests: they are attempting to pass along a cost that they refuse to pay to a third party. In your best of all possible worlds, where all custodians work for free, and fund companies do not charge for custodial services, all for the betterment of the consumer, is a false utopia. If custodians are not paid, then they will get out of the custody business. Were you around when all “no-load” mutual fund trades had to take place at the funds? It was not utopian, believe me. You fail to acknowledge a fundamental change in the landscape over the last 25 years: open-platform custodians are a step in the right direction for the investing public.

Or, maybe we should just eliminate all open-platform custodians, and via legislation and regulation, appoint DFA and Vanguard as the only two fund families that could possibly be chosen by any rational investor or advisor, as you imply. That would make my job as a fiduciary to my clients much easier.

THZ

Tad Borek

Tad Borek

December 5, 2013 — 4:50 PM

The non-NTF ticket fee has always factored into a decision to use a DFA or Vanguard fund vs an alternative, if there was one – effectively setting a minimum trade size to keep costs within a desired range (I use both DFA and Vanguard funds). This fee increase raises the minimum trade, slightly. This issue comes up even with relatively high net worth clients, because trade sizes can be small during rebalancing, in those odd small side accounts, etc., and we need to plan for what’s going to happen in the future when gradually liquidating investments for cash needs.

Given the percentage size of the increase it does look a bit like “rent seeking from a captive audience” plus a nudge to use funds that generate more revenue. This coming on the heels of the fee increase/AUM minimum change for small RIAs, and is that trade-away fee reported here recently new too? Then again…I am 100% aware that these types of low-cost funds are more likely to be long-term investments. A fund purchase in this realm might mean no ongoing revenue, so require a higher ticket fee as a result, because there are costs involved to acting as custodian. I have no idea what those actual costs are, but other custodians doing it for less may be getting revenue in other ways.

If this is more in the nature of a nudge for competitive reasons, why not instead come out with RICs that are truly competitive to these other companies’ offerings? The last thing we needed was another batch of ETFs, that world is swamped already. DFA, in particular, still has offerings that are unique in their composition and lack the structural weaknesses of ETFs. Vanguard’s advantage IMO is its mutual ownership structure, which means its DNA encourages long-term cost reductions (instead of the opposite, rent-seeking, which (ahem!) is a risk with for-profit managers). Some of us believe that there are long-term advantages to passively managed mutual funds that are not tied to indices, and that do not have the potential for trading shenanigans that are present with ETFs – especially those in illiquid asset classes. Fido’s trading desks should be able to find trading advantages in those same asset classes. It’s not Peter Lynch style alpha, but still…

Fred Williamson

Fred Williamson

December 5, 2013 — 5:09 PM

BTW, who is “John Vogel?”

If you mean “John Bogle” you will find that any association of his with Vanguard is purely titular, if you do some research. The Founder no longer serves on the board nor holds an executive position.

Fred Williamson

Fred Williamson

December 5, 2013 — 5:10 PM

Steve Winks,

BTW, who is “John Vogel?”

If you mean “John Bogle” you will find that any association of his with Vanguard is purely titular, if you do some research. The Founder no longer serves on the board nor holds an executive position.

Stephen Winks

Stephen Winks

December 5, 2013 — 7:19 PM

Fred Williamson,

Typing is not my strong suite. But you got the point.

SCW

Stephen Winks

Stephen Winks

December 5, 2013 — 7:31 PM

Fred,

Once a founder, always a founder, regardless of once having served in an executive capacity.

You interest in research is intriguing, look forward to your deep insight in the future.

SCW

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