Vanguard Strips Back-End Loads Off 33 Mutual Funds Hot

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“After careful analysis of investor transaction activity and net cash flow, Vanguard determined that these fees, one of several measures in place to discourage frequent trading, are no longer needed,” the company said in its release. “The other measures include prohibiting an investor’s purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account. Vanguard funds also retain the right to reject any purchase request (including exchanges from other Vanguard funds) if such a purchase may negatively affect a fund’s operation or performance.”


In reaction to the news, Daniel P. Wiener, the editor of The Independent Adviser for Vanguard Investors, a monthly newsletter that keeps abreast of developments at Vanguard, issued this statement: “You may think the big news this week has been the fallout from the Facebook IPO debacle, or the gamesmanship around the Greek bailout, or lack thereof. But in my book the big news is that Vanguard has stripped the back-end loads off of virtually all of its funds.”


According to Weiner, Vanguard has removed the onerous back-end trading fees on most of its foreign equity funds, removed the one-year, 2% loads on the sector funds, and also gotten rid of the 1% back-end loads on closed funds like the PRIMECAP-run funds, and others like High-Yield Corporate and Selected Value. Only World ex-U.S. SmallCap and Global ex-U.S. Real Estate retain back-end loads or fees.


Why is Vanguard doing this? Well, Weiner’s take on it is this: “Vanguard says it’s (eliminating the back-end because the frequent trading it was trying to control just isn’t an issue any longer (if it ever was.) I would also bet that computer systems that block investors who trade into, or out of funds with rapidity or regularity have become good enough that the extra fees just aren’t needed.”


In addition, Weiner wrote that “back-end fees reflect poorly on a company that wants to be seen as consumer friendly, and it wouldn’t surprise me if some portfolio managers told Vanguard that with zero-transaction fee ETFs as competition, asset flows were simply not keeping up with expectations. Remember that Vanguard gets away with paying its outside managers very low fees in part because they can claim that their vast size will bring more assets the managers’ way. It’s the volume model. But maybe that’s not working so well for the outside managers. Vanguard certainly won’t say, but it’s a possibility.”


Weiner also examined “the actively-run (Vanguard) funds that are having the fees taken off and all of them but one, the brand-new Emerging Markets Select Stock, have seen net asset outflows (redemptions) over the last six months and last year. The move is obviously a positive for shareholders and, hopefully, keeps the active managers happy if it means there’s incrementally more interest in their funds now that the restrictions have come off.”


At least one advisor praised Vanguard’s decision to remove the contingent fees. “It is always encouraging to hear about a large investment provider, such as Vanguard, giving investors greater flexibility in buying and selling investments without restrictions,” said Aaron Skloff, AIF, CFA, MBA, the chief executive officer of Skloff Financial Group.


Skloff said his firm, through its institutional relationship with Fidelity Investments, is able to purchase mutual funds on a load-waived basis, or purchase load funds that normally have a load at Net Asset Value (NAV) without a load.  Some of those funds have a 60-day holding period to avoid a small fee, for example $30 or one-half of 1%.


“Fortunately, we are able to utilize mutual funds with and without the holding period since we generally do not purchase and sell within 60 days,” said Skloff, who noted that an example of a load-waived mutual fund with a 60-day holding period that his firm owns is the Thornburg International Value A.


Another advisor, Erika Safran, CFP®, the founder of Safran Wealth Advisors, questioned whether Vanguard’s decision was in reaction to what’s happening in the world and in the Eurozone in particular. Allowing investors to sell their funds without having to pay a fee, especially in sectors that could fall in value rapidly such as Eurozone-specific funds, will prove to be investor friendly.


As for whether advisors ought to use mutual funds with contingent redemption fees, Safran offered these thoughts: Advisors need not avoid buying such funds if they make sense for a client nor avoid selling such funds within the period in which a contingent redemption fee would be charged if necessary. Such fees, Safran said, are “irrelevant for a thinking investor but not someone who is caught up in fees.”


For the record, there are 1,485 distinct U.S. mutual funds (3,466 if you include the various share classes) with a contingent redemption fee, according to Morningstar. Slightly more than 2,000 of the 3,466 funds have a 2% redemption fee, about 100 funds have a 1.5% redemption fee, and the rest have a 1% or less redemption fee.

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