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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.