Investing for Dummies

December 10, 2006 9:32 AM

Does it matter where you buy a mutual fund?

Is there a difference between buying a mutual fund through its company versus buying through a third party?

Hypothetically, 'a friend,' is interested in a Vanguard index fund, VFINX. Is there any benefit from buying said fund directly through Vanguard, as opposed to buying the fund through a third party broker, let's say Scottrade, for example?

Would you pay a 2nd layer of management fees, Scottrade's on top of Vanguard's, based on this example?

Are there any perceived benefits from buying through a third party?

posted by jazzkat11 to work & money (10 comments total)

The only benefit that I know of is actually a lessening of fees--depending on how big your portfolio is, your IA may charge less than the company would directly. This is wildly variable, of course.

Read the prospectus--compensation & fees are laid out for you in black and white.
posted by dirtynumbangelboy at 9:50 AM on December 10, 2006

There is no real difference other than possible transaction fees when buying through a broker. Most discount brokers have a list of NTF (no transaction fee) funds that they allow you to trade without cost. Check the broker's website. The NTF funds pay a fee to brokers for the service of selling their funds so you don't have to. However, the broker may impose a short term redemption fee of perhaps $35 if you do not hold the fund for at least 90 or 180 days. Make sure you read the fine print on their commission schedule regarding mutual funds. For funds that are not on their NFT list, you will have to pay a commission to trade.

So you have to look at the broker's list of NTF funds and see if the one you want is on it. You must also check the broker's short term redemption policy. If you don't have to pay any fees, then there is no real difference between buying through a broker and buying directly from the mutual fund company. If you have a lot of funds from different companies, it may make keeping track of paperwork easier if you buy them all through a single broker.

Vanguard is a company that does not pay brokers to market their funds. Therefore, I am not aware of any broker that will trade Vanguard funds without charging a commission. For Scottrade that is $17 each way (buy or sell). Since you pay a commission, you aren't subject to their 180 day short-term redemption fee. If you are making a one-time investment of a large amount of money, the $17 fee may not matter. If you are going to make a series of investments, say once a month or once a quarter, the $17 commission may be too expensive.

I have purchased mutual funds using both methods.
posted by JackFlash at 11:12 AM on December 10, 2006

I've bought Vanguard mutual funds (but not VFINX) through a couple online brokers (E*Trade and Options (E)xpress), and apart from the initial transaction fee ($10-$15), there seems to be no additional charge.

One other consideration is that I've heard, second-hand, that Vanguard has good customer phone service for its account holders, if this matters to your friend.

This maybe goes outside of the scope of the question, but is your friend going to use a taxable account or a tax-free (eg 401k, IRA) account? If the account is taxable, he or she should consider VTMIX instead. It's similar to VFINX in that it tracks the S&P 500, but the management uses a couple basic strategies to minimize the amount of tax shareholders have to pay. This effectively raises the rate of return by, say, 1%-2% a year, which is actually a big deal.
posted by A dead Quaker at 3:42 PM on December 10, 2006

The broker may charge extra fees. Most brokers will have many funds available as NTF (no transaction fees) funds as mentioned by JackFlash. The broker may also have different restrictions than Vanguard on the minimum initial and subsequent investments. The main advantage of having all your investments in one place is convenience. Also, because of that aggregation, you might get a reduction in fees or a better level of service. By the way, Vanguard (via Vanguard Brokerage Services) also provides the ability to have all your funds, not just Vanguard funds, managed at Vanguard.
posted by dorab at 5:20 PM on December 10, 2006

Quaker, VTMIX (Tax Managed Growth and Income) is an institutional share class requiring a $5 million minimum, usually only available in a large 401(k) plan. VTGIX is the investor share class, but has a redemption penalty of 1% if shares are held less than five years.
posted by JackFlash at 5:25 PM on December 10, 2006

There is no real difference other than possible transaction fees when buying through a broker.

No, actually, this really isn't correct at all. Many mutual funds, including VFINX, have different 'classes' of shares in a single fund. Depending on whom you buy the fund from, you can get a different class share, possibly with different loads, resulting in different rates of return. Some share classes, such as VFINX's Admiral and Signal classes, require a minimum investment that is pretty steep. The management fees drop from 0.16% on the regular shares to 0.07% on the Admiral class.

VFINX doesn't appear to have A, B, C, D etc. classes, however; this is something that a lot of managed funds do, representing the fact that they can sell a share with a higher management fee through certain venues (generally brick-and-mortar fund retailers who are selling to inexperienced 'granny' type investors.) The worst share classes often have fees that are a few percent higher than the best share classes.
posted by ikkyu2 at 7:04 PM on December 10, 2006

Ikkyu2, I think you may be confusing loads and expense ratios. The classes of shares available through a brokerage and or directly from the fund are generally the same.

Vanguard has different classes of shares, but the Admiral shares are only available for investments of $100,000 and Signal shares for $1,000,000. Some brokers may make Admiral shares available for large investors. That's not something that the novice investor needs to worry about. All Vanguard funds are no-load, but these different share classes have different expense ratios.

When you talk about funds with A, B, C, D shares you are talking about load funds. Depending on which class you buy, you pay different amounts of fees up front, each year, or when you withdraw. Many brokerages will give you access to the various classes of load funds, according to your preference. However I would advise never buying a load fund no matter what, so I wouldn't worry about these classes.

So for most practical purposes it really doesn't matter whether you buy mutual funds directly or through a broker -- you will be getting the same class shares. If you are making $100,000 investments, you probably don't need to be getting advice here. The only consideration is that in some cases (you aren't buying a NTF fund, e.g. Vanguard) you can eliminate broker commissions by buying directly from the fund. This could be significant if you are making periodic investments into the fund.

If most of my investments were within a single fund family like Vanguard or Fidelity, I would buy directly from the fund. The same would be true if I were making periodic investments, in order to avoid commissions. If I had a lot of funds from different families, I would probably go through a broker. By purchasing only NTF funds, you can avoid commissions.
posted by JackFlash at 9:41 PM on December 10, 2006

Ikkyu2, I think you may be confusing loads and expense ratios.

I don't care what they call it; I care about how much of the fund's return isn't ending up in my pocket. I think most investors would agree with me.

I'd certainly agree that I don't see much reason to buy a load fund in 2006, but if the loads were low enough and I had enough faith in the fund manager, I might consider it.
posted by ikkyu2 at 10:01 PM on December 10, 2006

You are quite right that loads and expenses are important considerations when investing. It's just that buying directly from a fund manager or online through a discount broker has nothing to do with either. With both methods you get the exact same shares at the exact same price and the exact same expenses.

The choice of which fund you buy impacts loads and expenses, not the method of purchase.
posted by JackFlash at 10:14 PM on December 10, 2006

JackFlash, I think we're in almost complete agreement.

I do notice that when scrolling through the thousands of in-network and out-of-network funds available for my purchase through my Fidelity account, I am not always able to purchase every share class of each fund. For instance, there was one fund (Artisan or Janus, I think - something internationally-based) where I had a choice between the C and K shares.

That suggests to me that, for whatever reason, the A, B, and D-J shares were not available. Looking through the prospectus I recall thinking that the only difference was that the C and K shares had lower loads, although I also recall noticing that many of the share types had differing tax implications in terms of the way they handled expenses, fees, dividends and distributions.

If you've more to contribute on this topic I'd be delighted to learn it, here or by email.
posted by ikkyu2 at 3:12 PM on January 2, 2007