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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