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Ed. Note: MFI's Frank Armstrong recently responded to a reader question about Vanguard's annual account fees. We thought readers would be particularly interested in this topic, and have reprinted the Q&A below. To view over 400 answers from Frank and other experts to reader-submitted questions, visit our Q&A section. The Impact Of Annual Account Feesby Frank Armstrong The impact of annual account fees falls hardest on small accounts.
This is a real cost, and must be considered in your investment
decisions. In your case, with three accounts totaling $10,000 the cost
of $30.00 is 0.3% per year. If, when you add this cost to your mutual
fund expense ratio, Vanguard is not competitive with other similar
funds, you might want to invest someplace else. Since the fee goes
away at $10,000 you might also consider consolidating your holdings
into a single fund. Finally, you might transfer your funds to a
discount brokerage. But, then you might find that you had to pay a
transaction fee for each purchase or sale. The problem from the fund family's point of view is that it costs
about $35 per account to cover all their administrative expenses.
Those expenses would include mailing out your statements, manning the
telephones, tax reporting and all the other functions that take place
behind the scenes. So, small accounts, being loss leaders, are not
highly prized by fund companies. In order to maintain low expense ratios for all accounts, Vanguard
imposes the $10 annual account fee on small accounts. At this cost
it's still a loss to the fund, and larger accounts are forced to
subsidize smaller accounts. If Vanguard were to raise their minimum
account size, or impose even higher annual account fees, or both, they
could have even lower average expense ratios. Of course, Vanguard's problem is not unique. All financial
institutions face similar choices. Many other fund families have
either much higher expenses, or higher minimums, or both. In the real
world that the fund companies have to live in, too many small accounts
means you go broke. From that perspective, Vanguard's policy is pretty
reasonable. I always favor full disclosure. Vanguard's record on disclosure is
one of the best in the fund industry. But, you have a very valid
point. Perhaps all fund families should be required to better outline
the impact of any minimum or annual account charges, and when they
might be imposed. Frank Armstrong, CFP, is the author of Investment
Strategies for the 21st Century, published here,
President of Managed
Account Services, Inc., a fee-only Registered Investment Advisor,
and Chief Investment Strategist of DirectAdvice.com. Get The Facts:
For detailed fund information, risk, rankings, and performance, click here.
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Dear
Frank: Most experts give Vanguard credit for effective cost
management, but I discovered belatedly that they charge $10 per
account per year for small investors. I have three accounts totaling
$10,000, so I pay $30 a year. How come these costs are never shown in
mutual fund tables? They are just as real as loads and drastically
reduce the returns. --Rob
