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I was an independent advisor for Charles Schwab but have always entrusted my money to Fidelity. I’ve been spoiled by the elite service, very knowledgeable telephone reps and emphasis on mutual funds. I see Schwab more as a bunch of swashbuckling stock enthusiasts offering mutual funds merely to have a presence.
I’ve snubbed Vanguard despite its reputation as the hands-down low-cost provider because of its notorious service shortcomings—insufficient online tools, limited telephone hours, poorly trained agents and no local branches. I want a comprehensive online platform, 24/7 availability and the option of personally depositing a large check I hesitate to send through the mail. Of course, readers might say that the buy-and-hold investor who makes periodic automatic contributions does not require that much handholding.
But is the royal treatment at Fidelity worth missing out on Vanguard’s vaunted cost advantage? I determined to find out. I conceived of a portfolio that has proven popular and effective for the long-term, consisting two-thirds of primarily large cap stocks and one-third bonds. The stock allocation would be split evenly between domestic and international funds.
A numbers kind of guy, I set out to compare the expense ratios for the two groups’ three target funds—the S&P 500 or large cap-surrogate index fund, total international index fund and broad bond index fund. I was startled by the results and think you will be, too.
Why so surprised? Well, because using comparable funds according to Morningstar, Fidelity emerges as substantially cheaper (.01) than Vanguard (.07). How can the cost of Fidelity’s portfolio be so microscopically low and Vanguard’s so relatively high? One culprit is the relatively large fee (.12) paid by owners of Vanguard’s international fund, when Fidelity imposes no fee at all on its zero-fee international fund’s shareholders.
I also substituted Fidelity’s zero-fee large cap fund for its conventional S&P fund. Then, curiously, Vanguard charges twice as much for its bond index fund (.05) as Fidelity does for its counterpart (.025). In fact, the cost of each of Fidelity’s three funds is lower than it is for the similar fund at Vanguard.
Did I cheat by replacing Fidelity’s conventional S&P and international stock funds with their otherwise very similar zero-cost alternatives? I don’t think so. Just how comparable are they? Taken from Morningstar, the top ten stocks in the S&P fund and its proxy are the same, as is their downside risk. The funds’ performance in the 2022 correction and 2023 recovery is also identical. The same scenario prevails for the total international index funds..
Some readers in the early accumulation phase might prefer to be invested more aggressively and ditch the bond allocation. Once again, Vanguard falls a little short. Its average cost for a 50/50 split between the U.S. and international large cap index funds is .08 contrasted with .04 for Fidelity. The offender again is Vanguard’s higher international fund fee.
Although for the innovative investor Fidelity wins the cost competition, Vanguard offers far more in-house index funds (over 100) than its competitor (24). Further, Vanguard’s fees on most index funds other than the large caps analyzed here are markedly lower than those offered by rival fund families. For any readers who occasionally slink into active funds, Vanguard’s fees are also dramatically less costly.
I started out wondering whether the first-class services offered by Fidelity were worth the added cost. I’m left asking why settle for a thrift shop when we can get a better deal at the designer boutique?
Notes:
Vanguard Funds
S&P 500 Index Fund
Total International Stock Index Fund
Total Bond Market Index Fund
Fidelity Funds
Zero Large Cap Index Fund
Zero Total International Index Fund
U.S. Bond Index Fund
I’ve never seen robo-advisors mentioned on HumbleDollar, but that’s the route I chose to go when I was sick and hastily simplifying my portfolio for my wife. I moved our IRAs into Betterment (me) and Burton Malkiel’s Wealthfront (her), which is pretty duplicative because they both use many of the same ETFs for diversification. I’ve stayed because I love the simplicity and I’m something of a lazy ass, and when I adjust my mix to become more or less aggressive, the change in holdings happens automatically.
And both use primarily Vanguard stock ETFs, not Fidelity. Perhaps because they don’t need the service quality, perhaps for some other reason. I never bothered to ask. Most of the 63% stock portion of my Betterment account is in VTI and VEA. A big chunk of the bond portion is in AGG, which is an iShares fund, and I have smatterings of smaller holdings. None of it requires any thought from me.
Mike, someone (I assume you!) has done a great job setting up your 60/40 portfolio. You’ve got total market and developed international and AGG, which is like a total bond fund. And you can snooze through all the way. You don’t sound like a lazy ass to me, just a market savvy guy who values his free time.
Thanks, Steve, but what I like best about this arrangement is I didn’t have to do any of it. With the robos, you just set a risk level and it adjusts automatically. I can take no credit for it at all.
Not sure I understand the Schwab hate. their index funds are essentially free too. i think their customer service (in person and on the phone) is great. I’m not unhappy to manually sweep funds to a money market fund occasionally. And I recently found out that Fidelity has a significantly higher account minimum amount for a pledged asset line of credit. Not consumer friendly at all.
Hi Mike,
You’re right, Iooking back, I probably was too hard on Schwab. Yes, their expense ratios are extremely low, but they have only a few index ETFs (my thing). ETFs and to some extent even mutual funds are not as much their thing like they are at Vanguard or Fidelity.
I was uncomfortable with how hard they pushed me to sell in-house products and steer people away from non-house ones. (Remember, Schwab is a public company and pressured by shareholders to maximize earnings and fuel the stock price.)
Their service is quite good, much, much better than Vanguard’s but in my opinion anyway not as good as Fidelity’s. I had some paperwork problems with Schwab and I don’t like that their phone reps often just serve as triage people who need to farm out questions to specialists rather than able to answer questions themselves. In my experience, I’ve found that the Fidelity rep who gets my call is more sophisticated and better able to handle the problem himself and save me some wait time. And, as you say, their sweep demand is an all-too-obvious way to “steal” interest that should go to the customer.
That’s my take anyway. Seems you’ve had a better experience with Schwab and feel very comfortable with them, and that’s good.
Steve, I can’t argue with your numbers and I can see how easy it is to conclude that Vanguard funds are not necessarily the lowest cost. I can also see why some investors would want to own the zero-cost Fidelity alternatives.
But I have to wonder if the difference of a few basis points in fees is that significant. I also have to wonder if there’s more to cost than just the expense ratio. Consider:
When a Vanguard fund loans securities to short sellers, all the fees received are returned to the shareholders. To my knowledge, Fidelity keeps a portion of these fees for itself (to help pay for the zero-cost funds, perhaps?)
Vanguard index funds and ETFs are different share classes of the same pool of assets. When a Vanguard ETF exchanges low cost-basis shares with an authorized participant, shareholders in the partner index fund enjoy the tax advantage as well. Vanguard had a patent on this feature which has expired. Will Fidelity implement this same feature?
Hi Philip,
I agree with you there are factors to consider here—some financial and some moral—other than raw cost. But I think you’re underestimating how much that .06 difference can make. The effect on compounding is substantial.
Let’s say at age 30 both investor A and investor B invest a $10,000 lump sum into a fund and also methodically contribute $250 a month until they retire at 65. We’ll also assume that their fund earns the average market return of about 9% annually.
How much does the .06 difference in cost matter? Quite a bit. At age 65, investor A has accumulated $977,000, while investor B has a nest egg of $961,000. A $16,000 difference may not be a windfall, but for most people it would indeed be significant.
Hello Steve. Let me try to understand your argument.
If a Fidelity fund has an expense ratio six basis points lower than a corresponding Vanguard fund, does your example assume that the annualized return of the Fidelity fund over 35 years will be .06% greater than the Vanguard fund’s return?
In other words, are we assuming that the ultimate difference in performance is due solely to the difference in expense ratios?
I’ll argue that it’s possible the performance of the Vanguard fund could meet or even beat that of the Fidelity fund due to factors like higher short seller fees and lower capital gains distributions over the 35 years.
Also, if a Fidelity and corresponding Vanguard index fund track similar, but different, indexes, this also could contribute to a difference in performance.
The gist of your posting, as I understand it, is that you’re better off owning Vanguard ETFs in a Fidelity brokerage account because of Fidelity’s superior service. You could also choose Fidelity funds because they’re cheaper. But I’m not sure we can assume that the Fidelity funds will always outperform their Vanguard counterparts solely due to the difference in expense ratios.
Hi (again) Phil!
A lot of good questions. Let me try to answer them as best as I can.
Yes, I’m assuming that the difference in performance is due to the compounding of the small difference in the expense ratios. I agree that many other factors (like short-selling costs) may have inflated (or deflated) the outcome favorable to Fidelity. But, in the absence of information indicating that those ancillary “expenses” influenced the results one way or the other, I am left to consider them as random (as a compromise because we don’t know in which direction if any the data might have “spoiled” the result.) The only variable I know “for sure” made some difference is that .06. Might those other factors have distorted the results, sure, but we can only guess about “in what direction” and “by how much.”
Philip, I definitely do not recommend that investors in Vanguard’s funds go to Fidelity because of its superior service. Fidelity will only find ways to charge and harass you for the “indignity” of staying with Vanguard funds. If you own Vanguard funds, you’d be much better off staying with Vanguard, especially if you are a committed and well-informed long-term investor who won’t need much handholding. (ETFs might
be a different story because Fidelity wouldn’t penalize you for owning Vanguard ETFs at Fidelity.)
All I am trying to say us that you can get better service and “likely though not
certainly” a slightly better investment result with the Fidelity Zero funds.
Sorry Steve, but this second sentence is misguided.
‘I definitely do not recommend that investors in Vanguard’s funds go to Fidelity because of its superior service. Fidelity will only find ways to charge and harass you for the “indignity” of staying with Vanguard funds.’
To buy a Vanguard mutual fund in a Fidelity account will cost you a transparent transaction fee of $75, the same as for any other fund family whose funds are not available in their network without a fee.
I’ve held Vanguard ETFs in my Fidelity accounts for years and have never heard a single word about these from Fidelity or faced any issue with these holdings at all.
I’ve also held for decades mutual funds from companies outside their network that I’ve bought directly and then transferred into Fidelity. Never a word, never an issue.
I’m not recommending anyone move their Vanguard funds to Fidelity either, but a suggestion that Fidelity is going to “find ways to charge and harass” those that do doesn’t hold water.
Hi Mike,
I just got off the phone with Fidelity and found to my utter amazement that you are right—no extra fee for Vanguard. I’ve held non-Fidelity funds with Fidelity many times without “penalty” but thought Vanguard was the exception. Clearly, I was wrong. I apologize to you as a reader and learn once again that when you write for HD you may occasionally bump into someone who knows more about your topic than you do. Peace.
I’ve never posted anything to this site before, but I have really have enjoyed reading the posts and comments for a few years. I use Vanguard exclusively for my investments. I value the structure of the firm, the philosophy, the fees and of course Jack Bogle (I even had the good fortune to meet him at their home office location). Here is a link to an article by Allan Roth (whom I also trust). The article is a little out of date, but I guess it is one reason I remain at Vanguard despite the fee difference.
https://www.financial-planning.com/opinion/vanguard-vs-fidelitys-zero-funds-on-fees-expense-ratios-and-tax-efficiency
A great article by someone who seems to be a very conscientious and ethical advisor (only hourly fee, etc.). And I have heard that Vanguard funds’ tax efficiency is somewhat better. But fees? How much lower than zero can you go? I don’t think the motive behind the move really matters here. Who among us would turn down a loss leader at our favorite department store because others might have to pay an infinitesimally higher price for other goods?
Trust? How can you trust a fund family notorious for service lapses? I’m not sure what he means by the structure of the index fund? The Zero funds are virtually identical with their comparable Vanguard funds—9 out of the top 10 stocks are the same, as are their top three categories—financial, industrial and tech.
Anyway, that’s my take.
Thanks Steve for a great article.
I switched from Vanguard to Fidelity earlier this year due to 2 major customer service issues with Vanguard in the past year. I came to the conclusion that I would gladly pay for better customer service. So far I have not had to as I still have Vanguard etfs, but can switch to equivalent Fidelity funds or etfs if I want to.
Fidelity customer service is first class and they are accessible when you need them, not just during banking hours. I have a team in the local branch that I can meet with in person as needed.
IMO, Vanguard has taken their focus on low cost too far. Even DIYers like me need help sometimes and good look with that with Vanguard’s offshore call center.
You said it well: Vanguard may have taken their focus on cost control too far. Just yesterday, I was surprised to see a good friend (who I’ve written about in a previous HD article) at my Fidelity branch. But I knew he had all of his accounts at Vanguard! Not any more. I’m not sure I’ve got this right but he seems to have received a letter from Vanguard that his 1-person 401k had been farmed out to another advisor and that his Vanguard account no longer had a balance. Eventually, he managed to get the third-party advisor to send him a check he was now promptly depositing in his new Fidelity account! I’m sure there are some would-a, could-a, should-as the other way around, but this one was priceless.
I have funds at both Fidelity & Vanguard. At VG the expense ratio is higher for the funds I own and I dislike their website. Fidelity is more user friendly and has more robust info, but it still lacks in necessary research I need for individual stocks.
FWIW, Fidelity also has a community forum which is more for amusement; or danger for a new investor. I don’t know if Vanguard has a forum.
Vanguard has been revamping their website for quite a while now. I do like the new look. For a time it wasn’t reliable for placing a trade. That seems to be fixed.
Agreed, and the service difference is profound. But I have come to believe that Schwab offers the best platforms for investing in individual stocks.
I don’t see why anyone should have ethical qualms about owning Fidelity’s Zero funds. No one is being forced or suckered into settling for their money market rates, buying their actively managed funds or paying for other services.
I own some Fidelity Zero funds. I also have cash in their money market accounts.
I have a couple of Vanguard ETFs in my Fidelity accounts, and would probably have owned VDIGX years ago except I can’t do it without a fee at Fidelity.
The reason I personally stay with Fidelity is service, trust and familiarity. If they want to offer a zero fee fund in hopes I or others buy something else too, fine. To each their own.
Great article.
Obviously I’m in agreement with you. When I walk into the office supply store that advertises discounted computer paper on its storefront, I go in to buy some without qualms that in order to maintain his profit margin the owner must microscopically increase his prices on other goods.
Keep in mind that Fidelity’s Zero total international fund has only about a third of the companies that Vanguard’s total international fund has. I gladly pay a few basis points for the extra diversification.
Randy,
First I want to apologize for taking so long to respond—I went sleep very early last night!
But Randy, you’re way off base when your reason to go with Vanguard Total International is that it’s meaningfully more diversified than Fidelity Zero. Here’s why:
Many market observers have noted that adequate diversification can be achieved with just 30 stocks! The difference between Vanguard’s 8500 and Fidelity’s 2300 is immaterial.
Nine of the ten largest holdings in the funds are the same.
The representation of the largest three sector is the same: Financials, Industrials and Technology.
A primary goal of diversification is to reduce downside vulnerability, but their standard deviation is the same (17).
Investing with Vanguard rather than Fidelity has many advantages, but meaningful diversification is not one of them.
Sorry for the rant, but you got me going.
Steve
No apology necessary, Steve. Thanks for setting me straight.
For me, the overriding consideration is the operating structure due to who owns the company. Fidelity is privately owned. Vanguard is unique in that it is a true mutual fund company, i.e., it is owned by its funds, which in turn are owned by the investors. With no external shareholders demanding profits, Vanguard can operate at cost. I choose Vanguard over Fidelity (or any other), just as I chose a nonprofit CCRC over a for-profit one.
I’m at Fidelity because the owner has earned my trust. It’s not like they report to millions of stockholders, so she can operate the company without caring about short-term profits.
As always, there are macro considerations that may make sense and also be more humanitarian than a search for economic benefit alone. But there are also instances when a for-profit enterprise—whatever its motives—offers a certain product below cost.
Steve: I have lots of issues with Vanguard. But on this one, I’ll come to the firm’s defense. You’re taking the funds that Fidelity is using as a loss leader and comparing them to the funds that Vanguard operates at cost, while ignoring how Fidelity — along with Schwab — make much of their money, which is by shortchanging customers who hold cash at these firms.
Jonathan, you are of course right that as an aggressive asset collector, Fidelity is making up the fee by slightly overcharging other investors. But for the innovative investor looking to minimize cost the opportunity to do so is there. The morality of a single person “taking advantage”of his fellow investors is certainly an issue to take into consideration.
I agree. I have my health savings account at Fidelity, and it’s split between two of the firm’s zero-cost index funds. But if all investors did what I did, those zero-cost funds wouldn’t be zero for long.
We also have HSAs at Fidelity, which are invested in Vanguard ETFs 🙂
Very true. Truth be told, I’m almost there but I wish I had been as enterprising as you were earlier on my journey!
Excellent
Nick, see above response to Jonathan.
Very interesting. I’d never take the time, but you made me feel good as I consolidated everything with Fidelity a couple of years ago.
Dick,
You did good!
If you are designing a three fund portfolio, why would you use the S&P500 rather than total US market? Although the results may be the same. I have yet to have problems with Vanguard’s customer service, although I may just be lucky, and I use more than three funds.
I would also prefer more than a three-fund portfolio, but some people prefer the simple elegance of the classic approach. The results were the same when the total market fund replaced the S&P. I removed that analysis because I thought otherwise the article would be too long!