Where To Shop For Mutual Funds

There’s been a shake up in the world of mutual fund supermarkets. I’ve long believed that investors can maximize their investment returns by simplifying their financial lives. One way to simplify is to consolidate your investments at one mutual fund family or one broker that allows you to purchase mutual funds from different families – known as a mutual fund supermarket.

Many of you prefer the mutual fund supermarkets because they let you purchase funds from different families in one account. Even better, many of my recommended funds can be purchased without paying a fee through the no transaction fee (NTF) programs offered by these brokers. An investor who also wants to own a few individual stocks also can do that through the broker’s programs and still have all their investments in one account and on one statement.

The fund supermarkets were hit hard by the bear market. Many of the smaller brokers and supermarkets have fallen by the wayside or merged into other firms. Others increased fees and account minimums – in some cases dramatically. The result is that most investors choose to consolidate their mutual funds at either Charles Schwab, Fidelity, or Vanguard. Those seeking the lowest fees still might choose E*Trade, TD Waterhouse, or Muriel Siebert. I find that most of my readers, however, choose one of the big three.

Let’s take a fresh look at these three based on developments in the last few years.

Fidelity beefed up its brokerage services substantially over the last few years. In fact, most of its advertising now pushes its range of brokerage services instead of just its mutual funds and their performance. Fidelity has offices in major cities around the nation and offers trading through all kinds of technology: automated telephone, Internet, and wireless.

A big advantage of Fidelity for some investors is that it is the only place where Fidelity’s hundreds of no-load funds can be purchased without paying a transaction fee.

The major disadvantage of Fidelity is cost. It has the highest minimum transaction fee of any mutual fund supermarket ($75) for trading funds not in its NTF program. In addition, the fees on its mutual funds tend to be above average, and many Fidelity funds have either low front-end loads or redemption fees.

Don’t look only at the minimum transaction fee, however, or you might miss the true cost of trading. Fidelity’s $75 is a flat fee, regardless of the amount of shares traded. Schwab and some other brokers have a minimum fee of $35 for online trades but also charge an additional three cents for each share traded above 1,000. Under this formula, some trades will exceed Fidelity’s fee.

Vanguard is quietly and without advertising advancing in the fund supermarket business. It used to be an afterthought for shareholders who wanted to own a few non-Vanguard funds. I received reports from subscribers of poor and limited service.

Now, Vanguard brokerage is a full-fledged and valuable service with a very good web site and other features.

As usual, Vanguard is the lowest cost of the big three. It charges a flat $35 trading fee for funds that are not in its NTF program and a $50 fee for switching between two non-NTF funds. The size of the transaction doesn’t matter. Of course, this is the only supermarket through which Vanguard funds can be purchased without a transaction fee. This is important for income investors, because the low fees on Vanguard’s bond funds make them among the best available.

Vanguard has the highest minimum purchase and account opening price ($5,000), which is one way it keeps costs low. It also has the strictest trading limit on its NTF funds. To avoid a transaction fee, an NTF fund cannot be sold within one year of its purchase. In addition, you’ll pay more than the transaction fee. Trade an NTF fund within one year and you’ll pay the higher of $50 and 1% of the transaction.

While Vanguard has vastly improved its web site and other uses of technology, it trails both Fidelity and Schwab in this area. Vanguard also does not have offices around the country as the other two do.

Another possible disadvantage of Vanguard is that it offers the lowest number of total funds and NTF funds. I don’t weight this factor heavily, because most of the supermarkets beef up the number of funds available by offering funds I don’t care to own. The NTF funds that interest me at Schwab and Fidelity also are generally available in Vanguard’s NTF program.

Charles Schwab & Co. created the mutual fund supermarket and the NTF program and since has been the leader. It also has more offices around the country than any broker who is not a full service, full commission broker.

Since the bear market, Schwab has been changing its business a bit. Schwab no longer wants small investors. An account maintenance fee of $50 per year is imposed on accounts smaller than $50,000. Schwab also wants to discourage the use of its personnel, including at its many branch offices, for simple trading. Higher commissions and fees now are charged for transactions that use Schwab personnel while discounted fees are paid by those who trade through the Internet or automated telephone system. The minimum mutual fund trading fee is $39 ($35 online), and it rises based on the number of shares traded. There is a new $60 fee for each Schwab account that is closed.

Schwab also is moving away from its traditional “no advice” business. It offers some financial planning and investment advice services. As part of its mutual fund supermarket, Schwab always has offered its “Schwab Select” list of what it believes are the best mutual funds. This list and detailed mutual fund information are available free on its web site.

Schwab also offers some technology extras not available elsewhere. I’ve always liked its MoneyLink service. This allows for transfers directly between Schwab and your bank account. You can schedule a monthly draft either into or out of your bank account, for example, or schedule transfers as you need them using the web site.

The mutual fund supermarkets are not for small investors. The big three are trying to attract more wealthy investors by offering extra services and lower fees. Each firm offers a range of extras to its wealthier clients, and different account values trigger different benefits. If you have $500,000 or more to invest, be sure to ask about extra services or lower costs that might be available. The benefits might be available if the money is held in different accounts (such as an IRA and a taxable account) or even among different family members. Often, you don’t get the extras unless you sign up for them.

There is no clear winner among the big three fund supermarkets. If you invest primarily in Fidelity or Vanguard funds, you should buy all your funds through their brokerages. Investors who will buy NTF funds I recommend should be comfortable at any of the three. Then you should consider other factors such as whether a nearby office is important to you, extra fees you might incur, and the technology or personal service available. For income investors, Vanguard bond funds tend to be my first or second choice in most income categories, and slashing fees is an important step in maximizing income returns. Vanguard should be the income investor’s choice.

Next month, I’ll list my recommended funds for each investment category at Fidelity and Vanguard and also in the NTF programs.