When Vanguard is actually more expensive

[theknitcycle]

Hi, so here's the situation.  I work for a company that's affiliated with a national brokerage firm.  Because of the affiliation, FINRA rules require that any investment account I hold has to be through my employer.  So no accounts directly at Vanguard allowed.

I can buy Vanguard funds through my account with my employer.  But the kicker is, as an employee I am exempt from the sales charge on A shares and can purchase loaded funds at NAV.  But there is no employee exemption for the ripoff $30 transaction fee on any purchase of no-load funds.  So any Vanguard fund costs me $30 per purchase.  Which could maybe make up for itself if I were just investing windfalls and huge annual bonuses (keep dreaming), but there's no way the low expense ratio can make up for getting hit with $30 a pop on the $200-300 at a time I'm able to invest.

Advice?  Basically I guess what I need is a fund or fund family with a front load (which I won't have to pay) and then a low ongoing expense ratio.  Or am I overlooking some other solution?

[rpr]

Basically, your company is ripping you off by levying the $30 transaction fee. Are there any inexpensive funds that you can invest in. What is the typical expense ratio? Do these funds have transaction fees when you sell? At this point it doesn't look like you have a whole lot. When your accumulation starts to become significant, perhaps you can think of transferring to Vanguard and investing in a single fund such as Target retirement.

[lpep]

That sucks!

My guess is there's some math you can do here, and the answer will depend on how much your money earns. If the expense ratio (say, 1%) is higher than $30 times the number of times you invest each year, minus the little fee Vanguard will take, Vanguard is still the better option.

Say you have $50000 invested earning 15% (ending the year at about $58k, not including any additions). 1% of that 15% is about $80. VTSAX has a .05% expense ratio, or about $4. You would only have to invest 3 times per year for Vanguard to be a bad choice. Of course, this all depends on the expense ratio of whatever fund you choose as well. The amount you invest is moot since that wouldn't change no matter where your money goes.

Say you have $200k invested earning the same 15%. You end the year up $32k. At 1%, that's $320, so you would have to invest 10x per year for Vanguard to be a bad choice.

It looks like if you don't have much to invest, and want to keep adding to it monthly go with a different fund where you pay no fee. If you have a lot to invest, Vanguard looks like the better option regardless of the $30 charge.

Since you're talking about adding $200-$300 each time, I'm guessing you don't have much to invest starting out. I think you should find the lowest fee fund with no $30 charge, and use this math to figure out when to switch to Vanguard!

Someone check my math here, but this seems right to me.

[rpr]

Ipep -- it is worse. The 1% is in the total. Not just the gains. Assume that your company funds have expense ratio of 1% and Vanguard has expense ratio of 0.05%. You are better off going with Vanguard when you have greater than $3158 to invest.

0.01 x - 0.0005 x >  30

x > 30/0.0095  which is approximately $3158

[theknitcycle]

Since you're talking about adding $200-$300 each time, I'm guessing you don't have much to invest starting out. I think you should find the lowest fee fund with no $30 charge, and use this math to figure out when to switch to Vanguard!

Someone check my math here, but this seems right to me.

Correct, not much for now.  I have about 20k in a Vanguard fund now (which is how I learned about the fee, suddenly having a -$30 cash balance after placing that trade), but everything else either went to my recent home purchase or is sitting in shorter-term savings for work I know the house will need in the next year-ish.  So basically looking at what to do with the monthly surplus after 401k/HSA/expenses.  Accumulating elsewhere and then transferring to Vanguard is certainly an option.  I have access to most of the mutual fund universe, it's just an extra layer of math to figure out what's the best deal.

[theknitcycle]

Ipep -- it is worse. The 1% is in the total. Not just the gains. Assume that your company funds have expense ratio of 1% and Vanguard has expense ratio of 0.05%. You are better off going with Vanguard when you have greater than $3158 to invest.

0.01 x - 0.0005 x >  30

x > 30/0.0095  which is approximately $3158

Thank you!  I guess I can use this as a sort of extra motivation.  Plug in the actual numbers to that equation once I have the fund and its expenses figured out, then between the long term FIRE goal and the daily or monthly not-spending goals, I'll have this "how fast can I get to $3158 (or whatever the number winds up being with actual expenses plugged in)" game.  And "can I do the next $3158 faster than the last?"

This will be fun.

[lpep]

Ipep -- it is worse. The 1% is in the total. Not just the gains. Assume that your company funds have expense ratio of 1% and Vanguard has expense ratio of 0.05%. You are better off going with Vanguard when you have greater than $3158 to invest.

0.01 x - 0.0005 x >  30

x > 30/0.0095  which is approximately $3158

Holy moly! I thought it was just gains. That's just... blegh.

So 50k scenario: 1% of $58k is $580. 580/30 = 19 times investing.

200k scenario: 1% of $232k is $2320. 2320/30 = 77 times investing.

For 20k, 1% of $23k is $232. 232/30 = 7.7 times investing.

[stuckinmn]

I think that the finra rules require that any account that holds individual stocks must be at your employer but broad based mutual funds can be held away at the fund.

[theknitcycle]

I'll look into that.  It's possible that I misunderstood, or that the person who explained the rules did.

[TLV]

My understanding was also that it was only for individual stocks. For a while Vanguard's site lumped all publicly listed companies in with FINRA members, so I wasn't able to open a brokerage account with them until they fixed that, but I was always able to open an account for their index funds.

[ProfWinkie]

By friend is a broker and he says stuckman is right

[theknitcycle]

Update on this -- and a BIG THANKS!  I checked in on this difference in rules (how it was explained to me at work, vs. what ProfWinkie and TLV said) with my managers here and none of them had any idea what I was talking about.  Then I looked up the brokerage firm's compliance policies and they seemed to agree that a mutual-fund-only account held directly at the fund company doesn't count as a brokerage account and would be allowed.  The wording was unclear, though, so I emailed the regional boss of that sort of thing and just got confirmation back from her today.  Vanguard, here I come!

I only wish I'd known this sooner, before wasting money on fees and expenses that weren't actually necessary.  But still, I'll invest a lot more in the future than I have in the past, so this is very good news!