Higher Fees Ahead

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Last Monday, I wrote about a lawsuit that may potentially cut mutual fund expenses for investors. Now Vanguard is in the news signaling that higher fees may be on the horizon. Here are some highlights:

As if the market crash hasn’t been painful enough, more mutual-fund firms are set to raise their fees in response to falling assets, leaving shareholders with even less money in their battered accounts.

The decision by low-cost stalwart Vanguard Group to raise expense ratios for many of its mutual funds is a clear sign to investors of a tough year ahead.

After a brutal 2008, with many stock funds down more than 30%, fund investors face the prospect of paying higher charges this year as fund firms scramble to make up for lower asset levels.

Mutual-fund charges are based on a percentage of assets, but some of their costs — such as customer service centers and mailing out fund literature — are fixed. After the dramatic plunge over the past year, which has seen the industry’s total assets under management fall to $9.5 trillion from $12 trillion, hiking expense ratios is likely to be a viable option for many firms.

“It’s a testament to the market environment that even a fund family [like Vanguard] that’s been taking in new money has seen its assets decline so much that it has to raise its expense ratios,” said Dan Culloton, associate director of fund analysis at Morningstar Inc.

Vanguard said it had $84 billion in net inflows across all its funds in 2008, and $25 billion in net inflows so far this year. But according to Culloton, from the end of 2007 through the end of February, total assets under management fell to just below $1 trillion from $1.3 trillion.

So far, 31 of Vanguard’s roughly 110 funds have said they are increasing their expense ratios. The average increase is 0.05%; last year, Vanguard’s average expense ratio was 0.2% per fund.

Vanguard is “not immune” to the poor market conditions, said John Woerth, a company spokesman. But, he added, on a relative basis Vanguard is “still the low-cost leader by far.”

Sure, Vanguard is still the low cost leader, no question about that. However, cutting costs and reducing staff maybe a better option because many investors may not return, or those who do, may do so only on a temporary basis.

Why?

Vanguard is the staunchest supporter of buy-and-hold and, despite 2 bear markets during this century, they have not adjusted their model to support changing conditions. Despite this recent feel-good rally, we’re still stuck in the midst of the worst economic downturn since the 1930s.

We’ve seen a huge market drop last year devastating most investors’ portfolios. This was followed by a 20% rally from the November lows to the end of 2008. 2009 saw a 25% drop in the S&P; 500 within the first 7 weeks, and now a 23% rebound in only 13 trading days; who knows what’s next.

What this all comes down to is that we are in an investment climate which simply does not justify a mindless buy and hold solution. Many investors (I hope tens of millions) had to learn this sobering fact the hard way and will hopefully from here on forward use a more intelligent approach to managing their investments.

If they do, that will not bode well for the buy-and-hold shops as investors are no longer willing to get stuck with a bullish investment in a bear market and subsequently paying for the privilege of seeing their portfolios getting another severe haircut again.

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Comments 11

  1. Ulli,

    I have watched that John guy from Vanguard come on T.V. and talk basically about buying and holding. He is no doubt a very brilliant man, but apparently very closed minded about trend following. I would think he probabaly knows how to trend-time the market, but that would not be in Vanguard’s best interest. We need more money managers (money manglers lately) out there that care more about the investor and adjust their company’s policies accordingly so that we don’t have to use one of those lazy portfolios. They appear to be basically for lazy people. Give us who use trend-timing a choice of switching funds as we want as we apparently are a minority anyway based on the mangling the average person took over the last 16 months and also from 2000 into 2003..

  2. Ulli,

    Your article about Vanguard really struck home. I have been a Vanguard account holder, both IRA and regular account, for over 20 years. However, I just got a mailing from them that they are increasing their brokerage fees and, to really zing the investor, even mutual funds purchased through the brokerage account (which includes non-Vanguard funds) will be subject to a 180-day holding period or suffer huge redemption/transaction fees if you need to get out sooner. I am moving this account to one of my other investment houses and closing the Vanguard connection before May 2009 when these changes are to take effect.

  4. Ulli,

    Maybe everyone should move out of Vanguard before the new added rediculous fees take place, that sure would shend a chilling message, just a thought. Wall street has to change as they have been a disgrace to society and these people have confirmed my belief that I have had for a long time and that is that they could care less about the investor, but only themselves. When they say trading hurts the long term investors who are they trying to kid? Traders or trend followers make up such a small percentage of their clients as evidenced by so many people around me getting mangled so badly, which tells me they are mostly buy & hopers so trading in their funds can't be the reason they are concerned. My hope is that everyone will fire their money manager this year and do their own account by following one of many good proven trend following strategies, Ulli's being one of them. I like using about three different ones. Maybe everyone that lost money over the last 16 months using a money manager should explain that they aren't going pay any fee anymore if they aren't making money. If the manager refuses that offer go somewhere else, it is a free world sort of.

  6. In life, three things are certain:

    1.) Death,
    2.) Taxes,
    3.) Vanguard bashing will always be in Vogue at The Wall Street Bully blog.

    Has anyone actually read this article closely? Here is the point that grabbed my attention:

    …31 of Vanguard’s roughly 110 funds have said they are increasing their expense ratios. The average increase is 0.05%; last year, Vanguard’s average expense ratio was 0.2% per fund.

    So what does this mean? Let’s parse it out:

    1.) Less than 30% of the funds have said they are increasing expense ratios. Let’s wait and see if they actually do it or not. That leaves more than 70% of their funds remaining the same.
    2.) The average increase is 0.05%. Maybe you need to take some time and digest that.
    3.) Before this “ridiculous” fee increase takes effect, the average expense ratio was 0.2% per fund. And the prospect of paying 0.25% scares you?

    As another reader admitted, I too am a long time Vanguardian. However, when it comes to paying for investment vehicles by which I expect to gain value, and knowing which custodians embody the salient features I need to accomplish my goals, I myself have no trouble making distinctions between different houses and using the finer features of those I’ve chosen to do business with, including Vanguard.

    Personally, I would not make use of Vanguards brokerage accounts. In my view their fee structure is horrible. But that has nothing to do with their MF expense ratios.

    Their MF accounts are very accommodative of what I need them for. I do my own investing for myself, my family, and a few of my family’s closest friends. I’ve been out of equity funds for nearly a year and a half now but have been making good use of bond funds and money markets. And every transaction is free. I’m well aware of their rules regarding penalizing quick ins and outs, but with ~110 funds to choose from I can work around that if I have to.

    If Vanguards MF expense ratios are scaring you as an investor, then maybe you need to move on. But if that’s the case I’m left wondering how an investor chose to do business with the company in the first place.

    G.H.

  8. Ulli,

    What I don’t understand is how Vanguard policies have limited me to buy and hold and not given me the freedom to follow investment approaches of my own choice.

    I have not encountered either of these problems at Vanguard.

    If I sell out a fund they tell me I cannot buy it again for 90 days in most cases. So what? If I was in a mid-cap value fund and I want to re-buy again inside 90 days then I’ll buy the mid-cap blend. Or some other fund that has percolated to the top of the FF statsheet.

    In other words, whipsaw signals from the market like we saw summer of 2006 are managable with little difficulty. And during the current bear market it has been wonderful to invest in funds such as VFIIX, VFITX, and VBMFX, all of which I have used during this time. And all of which have outperformed money markets in the time that I have been invested.

    John Bogle wants customers to buy and hold. But he doesn’t hold them at gunpoint and require it. And I’ve not been penalized one penny since 1999 at Vanguard. Unless you factor in that I didn’t discover The Wall Street Bully until 2003. Now that cost me some money.

    Ulli, I think we both know where we’re coming from. If I had to choose one or the other, Vanguard or trend tracking, it would be a no-brainer. But I can manage trend signaled investing at Vanguard with a portion of my portfolio.

    Cheers,
    G.H.

  9. GH,

    My experience at Vangard is limited to what many readers have shared with me over the years and a direct experience with a client whose annuity I manage(over $1 million).

    Apparently, the fund choices for annuities are very limited and anything they deem excessive in terms of overall trading (not just in 1 fund) results in a letter to my client. He called them several times to inquire as to the exact trading limitations, but they would not tell him. Even with modest adjustments in holdings warning letter were fired off to him.

    It seems to me that conventional investing, which may require quarterly rebalancing, is apparently not excepted either.

    While this maybe different in a brokerage account, it’s a headache with this annuity. Even if you are able to switch fund categories without any problem, it’s ridiculous to me that one has to engage in such fancy footwork rather than to concentrate on proper fund selections.

    Ulli…

  10. Ulli,

    Without searching the blog I’m going to rely upon memory and say that you’ve written about annuities and have used a negative tone when doing so. Based on articles I’ve read I believe annuities should not be the first choice of investors, if a choice at all.

    However, if the issue you’re raising is the manner in which Vanguard governs their annuity products, then why use a negligible increase in mutual fund expense ratios to highlight this problem? Rather, why not close in on the matter at hand and advise people to deliberately avoid annuities, regardless of who peddles the annuity.

    Annuities aside, I understood the main premise of this post as increasing mutual fund expense ratios and their detrimental impact on traditionally buy-and-hold philosophy shops, specifically Vanguard.

    Directly relevant and in-line with this premise I can say that opening either a VG MF account or a VG brokerage account (these are two distinct products) to invest in does not, as part of the terms and conditions of use, include contractual obligations forcing an investor to B-A-H. B-A-H is an ideology, not a contractual duty. If I sell a VG MF I have not breached. And I have a file folder brimming with trade confirmations accumulated over the years to prove that John Bogle has never commanded the B-A-H police to visit me with a subpoena ordering me to cease and desist self-directed entering and exiting of equity funds.

    You have access to far more anecdotal experiences with VG than I do. However, unless I can see some evidence that an investor has incurred portfolio damage solely due to VG policies, and not for any fault of their own, including complacency or lack of knowledge or poor decisions of the past, I’m not convinced that VG is worthy of the loosely targeted arrows being lofted at them. Certainly not in the case of MF accounts.

    G.H.

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