Mark Jewell

Vanguard’s move to lower fund fees could inspire rivals like Fidelity to act

By Mark Jewell
Associated Press / October 8, 2010

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Think of Vanguard as the Wal-Mart of investing. It manages more money than any other mutual fund company, so it has tremendous pricing power. When it makes a move, competitors feel pressure to follow suit.

Vanguard said it’s reducing fees for about 2 million of its individual customers, the latest in a series of cost-cutting moves that have turned up the heat on rivals like Fidelity Investments and Capital Group’s American Funds. “There is a race to the bottom on expenses, and Vanguard is winning huge,’’ says John Osbon, of Boston-based Osbon Capital Management.

Vanguard said it would lower how much money customers need to invest to qualify for its Admiral shares, which have the lowest fees. For index funds, which track market averages like the S&P 500, the minimum will drop to $10,000 from $100,000. For its actively managed funds, which are less popular, the investment minimum will be $50,000, down from $100,000.

Investors who meet the minimum will now, for example, be able to buy shares of the flagship Total Stock Market Index Fund at a fee of $7 a year for every $10,000 invested. The difference may seem small, but the savings can add up.

This year, $36 billion more has been deposited into Vanguard stock and bond funds than has been taken out, according to Morningstar. More has been taken out than put in at Fidelity and American, which emphasize actively managed funds.

Low costs don’t always translate into strong returns. But a wealth of independent research shows costs are key because they’re a definite and easily measured drag on returns.

Boston-based Fidelity closely watches Vanguard’s cost-cutting and is likely to cut fees, too, said Doug Dannemiller, an analyst with Aite Group and former Fidelity employee.

Spokesman Vin Loporchio declined to discuss Fidelity’s next move, but said the company is always evaluating products and services, “including pricing, to ensure that we are competitive.’’

Dan Wiener, editor of a newsletter called Independent Adviser for Vanguard Investors, said competition “is getting fierce. Vanguard is pretty much leading the charge.’’

Vanguard’s chief executive, Bill McNabb, did not contest comparisons between his company and Wal-Mart. “Wal-Mart is an organization that has created huge value for their clientele,’’ he said. “We like to think of ourselves as doing the same thing.’’

Fidelity and American Funds pride themselves on the depth of services they offer, while Vanguard takes a more basic approach to offering investment advice.

Vanguard can undercut rivals in part because of its structure. All three of the largest fund companies are privately held, but Vanguard is owned by its fund shareholders. Profits are plowed back into the company and used to cut fees.

Mark Jewell writes for the Associated Press.