Your investments and your accounts are two different concepts. You don’t “buy” an IRA. Your IRA is an account, a container. Your mutual funds, ETFs, CDs, and so on are your investments. You buy investments inside the container.
Likewise, who manages your investments and who manages your accounts are also two different concepts. Doing each job well requires completely different competencies. Now that major discount brokers Fidelity, Vanguard, Schwab, TD Ameritrade, and E*Trade all lowered their commissions for online ETF trades to $0, it’s easier than ever to choose who manages your investments and who manages your accounts separately based on the competencies of the respective companies.
Managing investments at the mutual fund or ETF level means buying and selling securities within the fund or ETF. In an index fund or ETF, the crucial jobs are keeping the expenses low and tracking the index well. In an actively managed fund, it’s about picking the right stocks or bonds, buying and selling at the right times, and managing risk. These are jobs for investment professionals.
Managing accounts is largely an IT function and a customer service function. It’s about keeping the customers’ transaction records straight, maintaining account security, issuing accurate statements and tax forms, having a good website for customer self-servicing, short wait times when customers need human assistance, and well-trained customer service reps who give correct answers. These are jobs for IT and customer service professionals.
These two areas of competency don’t have much overlap. A company can have great investment managers but poor IT function and poor customer service. Or a company can have state-of-the-art IT and great customer service but horrible investments. Doing well in one does not automatically lead to doing well in the other.
If you are impressed by the attentive service given to you by a full-service broker, it would be a big mistake to go along with the expensive funds that take more risk and underperform. On the other hand, it can be very frustrating if you go with a company that does very well in managing investments but you get your transactions and tax records all screwed up.
Before the recent change to $0 commissions for online ETF trades, each broker has its own preferred list of ETFs. You may have wanted Vanguard ETFs in your TD Ameritrade account but you had to pay a commission for each trade. So you had to settle with commission-free SPDR ETFs, or you had to move your account to Vanguard to buy the Vanguard ETFs for free there.
Now that buying any ETF is free everywhere, you no longer have to compromise. Just because you like Vanguard ETFs, you don’t have to go to Vanguard to buy them. Just because you like how Schwab manages your accounts, you don’t have to buy Schwab funds or ETFs in your Schwab account. If you prefer to have Vanguard manage your investments and have TD Ameritrade manage your accounts, you can buy Vanguard ETFs in a TD Ameritrade account at no higher cost than buying them in a Vanguard account. The same goes if you prefer iShares ETFs in a Schwab account. You can have iShares manage your investments and have Schwab manage your accounts.
Separating the jobs between managing investments and managing accounts leverages the competencies of the respective companies. The ETF managers just focus on managing the ETFs. They don’t interact with retail investors. The brokerage firms just focus on servicing the retail investors’ accounts. They don’t mess with managing the ETFs.
Schwab ETFs used to get preferential treatment in Schwab accounts. Now they have to compete with other ETFs on equal footing. They will have more pressure to do better. Vanguard used to be the only place to buy all Vanguard ETFs commission-free. Now customers don’t have to come to Vanguard to buy them. Vanguard will also have more pressure to do better in managing accounts. Over time, the best ETFs will win over customers regardless of where they choose to have their accounts, and the best online brokers will win over customers regardless of what ETFs they prefer.
ETF investors will enjoy this benefit of competition directly. Mutual funds are still in a walled garden. Vanguard funds enjoy a special privilege in Vanguard accounts. Buying a Schwab fund there costs money. Fidelity funds have the same privilege in Fidelity accounts. Buying a Vanguard fund there costs money. Still, the $0 commission on ETF trades introduces competition from ETFs. If Vanguard funds don’t keep up, customers can just buy a Schwab ETF. If Fidelity funds don’t keep up, customers can just buy a Vanguard ETF.
You get the best of both worlds when you choose separately who manages your investments and who manages your accounts. I have Vanguard manage most of my investments and Fidelity manage most of my accounts when I buy Vanguard ETFs in Fidelity accounts.
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Anita says
Hello Harry. Thanks to your excellent article a while back about how to open a Merrill Edge account (for a big bonus) plus open a BofA checking account, I am now a “Preferred Rewards Platinum Honors” customer with free ETF trades. (All my Merrill Edge funds are in Vanguard ETF’s) Plus (per your advice) I’m getting 2.62% on the BofA Travel Rewards credit card, transferring the points to my Fidelity account.
Question… Now that Fidelity is discontinuing its FIA card, that puts an end to the idea of moving the “Worldpoints” to Fidelity. I was wondering what you will be doing, or are you no longer using that mechanism? I continue to favor that 2.62% because it applies to ALL of my purchases. I do see one possible solution: BofA has another WorldPoints card in partnership with AICPA. I already have the AICPA Cash rewards Visa, but I see they also have an AICPA WorldPoints Visa.
Thanks much for all your great sleuthing… and great advice.
Harry Sit says
Anita – See comments and replies on the other article.
Anita says
Thanks for the link, Harry. I didn’t realize there were recent comments on that post that addresses the recent disconnect between Fidelity and FIA.
Anita says
Another data point about holding a Vanguard fund with another “custodian”. I recently opened a Schwab IRA, to earn a $100 “referral” bonus for investing $10,000. In convo#1 with Schwab, I said I wanted to invest a Vanguard mutual fund. The CSR said “Sorry, we cannot buy Vanguard funds. We’re competitors, you know (she laughs)”. This didn’t sound right. So I called and I talked to another CSR who said I’d been given wrong info. True, Schwab cannot “BUY” Vanguard funds, but they can “HOLD” them. So I did a “partial transfer in kind” of shares of the Vanguard mutual fund VBTLX from Merrill Edge to Schwab.
(And by the way, I also learned that many brokerages (including M.E.) offer free or inexpensive trades of ETF’s but NOT free trades of MUTUAL FUNDs. ($19.99 at M.E.) So I learned I’m better off keeping the funds in the equivalent ETF. (BND is the equiv of VBTLX),
abc says
Also, in my case, Schwab would reinvest the dividends without transaction costs. Since Schwab charges to buy funds, but not to sell, there is not fee if you sell after transferring funds in.
abc says
I’ve come to the conclusion that most brokerage accounts are about equal. So, I am ok with Fidelity, Vanguard, Merrill Edge, TD or Schwab as containers for my investments. I buy and sell very infrequently. I’m indifferent as to who holds my investments. This allows me to move Investments from one container to another and collect the promotional bonus. For example, I moved index funds from Fidelity and Vanguard to Schwab. Schwab paid me for doing the transfer. I can at a later date move it again. There is one exception to my saying the containers are equal – trading costs are not equal. Those investments I will be trading get positioned to where the cost is zero.
Tommy T says
You wrote “In terms of who manages my investments, Vanguard dominates.”
Please explain further as I assumed you would be in index funds in both.
Harry Sit says
Tommy T – When I buy a Vanguard ETF in a Fidelity account, it counts as Vanguard managing the investment and Fidelity managing the account. When all my investments are added up this way, in terms of who manages the investment funds, Vanguard dominates.
abc says
I had read the charts as if Harry was evaluating Vanguard and Fidelity. The charts are apparently just were Harry’ volume numbers.
JohnInIowa says
Harry, do you think that, besides service, which you mention as a defining difference for the various discount brokers, interest rates paid on cash balances might also be a defining difference?
I’ve read that before the recent zero commission change, some brokers were already making less on commissions than on banking. They paid very almost no interest to customers, while their banks earned much better rates on the cash they loaned out.
The flip side of that situation is that customers (like us) were paying less in commissions than they were losing (as an opportunity cost) for the interest rate they should have earned.
It seems to me that cutting commissions was almost just a red herring, to gain lots of attention but distract us from what might be a larger dollar amount, in the opportunity cost we pay for cash-balance interest.
Harry Sit says
Of course everything that affects us as customers counts, including interest rates paid on cash balances. However, I also think the complaint about low cash yield is somewhat overblown.
First, some brokers were charging commissions _and_ paying low yields on cash. They didn’t lower the cash yield because they don’t charge commissions now.
Second, no one complains that Ally Bank borrows at 1.8% and loans out at a higher rate. So if a broker pays only 0.5% and loans out at 6%, the difference between 1.8% and 6% is their normal banking profit. If the broker makes the bulk of its profit from banking, 75% of that is legit. Only the remaining 25%, between 0.5% and 1.8%, is from exploiting customers’ inertia.
Third, for those of us who don’t actively trade or time the market, we won’t have much idle cash anyway. Dividends and distributions can be set to auto-reinvest. In taxable accounts they can also be set to automatically transfer to an external bank account. If holding cash is part of your asset allocation, it can be done with a purchased money market fund, an ultra-short bond fund, or T-Bills.
abc says
Everyone has a different situation. For me the sweep and money market rates are important. So, I like Fidelity and Vanguard for their sweep and money market rates. I closed Schwab account because they changed their sweep option. I also am unhappy because Merrill Edge changed their sweep options, but stay with them because of their preferred customer benefits. I will open accounts with Schwab, TD Ameritrade and ETrade, but only to collect the cash promotional bonus.
yyz says
How does the company where you conduct your trading make any money if you own all your assets with a different company.
With the recent changes, I’m going to move my investments from Fidelity Mutual funds to Vanguard ETFs, but I’ll still be managing my account inside the Fidelity system.
How will Fidelity make a profit from me?
Harry Sit says
Many businesses operate under a freemium model. A basic level of service is free. Optional additional services cost extra. A small percentage of upgrades from a large customer base will provide enough revenue and profit to the business. If you don’t buy the optional additional services then they don’t make a profit from you.
Jay says
Harry, is it cheaper to buy/invest in ETFs or MFs? Thanks.
Billy says
I wonder if there is a broker besides Vanguard, that does not charge a fee to transfer/close account, or buy Vanguard mutual funds like VTSAX?
Harry Sit says
Fidelity doesn’t charge to transfer or close an account. E*Trade doesn’t charge for buying many Vanguard mutual funds. If your account is large enough at Schwab, they will waive fees on buying all Vanguard funds if you ask.