Vanguard Minimum Investment Cuts Overdue

Jeremy Glaser: For Morningstar I'm Jeremy Glaser. I'm here with Ben Johnson, he's our director ETF research, to look at some changes that Vanguard's making to its pricing structure and what it could mean for investors.

Ben, thanks for joining me.

Ben Johnson: Thanks for having me, Jeremy.

Glaser: Let's run through the news. Vanguard is changing some minimums and lowering some fees. What's happening here?

Johnson: What Vanguard is doing is effectively reducing the investment minimum for the Admiral share class of 38 of its index mutual funds. Up until today the minimum investment requirement to get into the admiral share class of these 38 funds was $10,000. Going forward, it will be $3,000 as opposed to 10,000. Thus, the bar is much lower for smaller investors to get much better pricing relative to what they were able to obtain previously via an investment in the investor share class.

Vanguard investors who are currently invested in the investor share class of these mutual funds can go to Vanguard's website today and try to opt in to this conversion. Otherwise they'll automatically be converted to the new lower fee, lower minimum, Admiral share class, effective some time around the second quarter of next year.

Glaser: What's driving this? Is this a competitive response to, say, the Fidelity zero funds? Is it just Vanguard passing on the benefit of its size to smaller investors? What do you thinks happening here?

Johnson: I think it's a little bit of all of these things, but first and foremost I would say that it's a competitive response to what we've seen in terms of similar moves that had been made previously by not just Fidelity, but also Charles Schwab. If you go back to February of 2018, Charles Schwab within its own suite of index mutual funds made a very similar and in fact more dramatic move reducing investment minimums in its index mutual funds to nothing, as well as slashing and rationalizing fees across those funds. Fidelity made a like move earlier this year, which took place concomitant with its announcement that it was launching a pair of zero cost index mutual funds. Simultaneously rationalizing, reducing investment minimums to zero within its index mutual funds suite.

Inevitably, Vanguard was going to have to respond, and indeed, if you look at a $10,000 minimum investment requirement for its admiral share class, if you look at the discrepancy and fee levels between its Investor share class and its Admiral share class, this was a move that, in my opinion, was long overdue, and I question, having not gone to a zero minimum, if it was move that was dramatic enough.

Glaser: What do you think is next then? Is there room for fees to come down lower? Is it just a matter of taking that minimum to zero? Or are we really already at rock bottom when it comes to fees?

Johnson: It's difficult to say. I think fees will remain under pressure. Investment minimums will continue to come down. I think it remains to be seen just how much Vanguard can respond given that Vanguard, structurally as a mutually owned organization, operating an at cost model, can only really pull so many levels relative to its competitors to make up lost revenues in other portions of its lines of businesses. While Fidelity and Schwab can adopt what are effectively more loss leader-like strategies, knowing full well that they might earn back some of the foregone fee revenues that they would otherwise get in the form of spreads and money market or savings account-type products, Vanguard has less room to wiggle, less room to operate when it comes to these other ways of earning fees off of their clientele. Vanguard's hands may be somewhat tied going forward as this fee fighting, as all of these price reductions across asset management products, as the lower thresholds grow ever lower still.

Glaser: Bottom line for investors, you mentioned you could potentially opt into this newer share class today. Anything else that would potentially change your plan or think about switching funds, or is it mainly stay the course here?

Johnson: I think it's stay the course. And also, to help you stay the course, take a more holistic view of the all-in cost of the business that you're doing with, whatever platform it is that you might be using. While at Vanguard you might have a somewhat higher minimum investment threshold, while fees may be non-zero, they're still trivial. But in other cases you have to look at what you're earning on things like a money market account or a cash sweep account relative to what you might earn if you were to switch to another platform. You have to look at the costs that are involved in switching, but explicit and the implicit costs that you would incur by way of realizing any potentially embedded taxable capital gains and either switching funds or switching fund platforms.

There are a whole host of other considerations that are far less obvious than just fees and investment minimums that investors need to be increasingly focused on as they understand the total cost of doing business with a particular fund sponsor, with a particular brokerage platform.

Glaser: Ben, thank you.

Johnson: Thanks for having me.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.