Index Investing: Moving to Vanguard

|| This article is Part Five in a series on investing with index mutual funds. ||
||   I. SpeculationII. Index FundsIII. John BogleIV. Vanguard   ||
||  V. Moving to VanguardVI. Asset AllocationVII. Maintenance  ||

In the previous articles in this series, I described the origin and nature of index mutual funds, why you should invest in them, and why investing with Vanguard is your best bet.  But what if you already have some investments at another company?  That's what this article is all about.

Should I Stay Or Should I Go?

First, you must decide whether it's worth the trouble to switch brokerages.
The Clash weren't sure either.

Things to consider:

1. What am I invested in?

If you're currently invested in individual stocks and high-cost actively-managed mutual funds, making a change is urgent!

Is it possible to trade Vanguard funds in your existing account, and if so, what are the transaction fees? Does your current brokerage offer index mutual funds? How do they compare to Vanguard's Total Stock Market Index Fund |VTSMX|, Total International Stock Index Fund |VGTSX|, and Total Bond Market Index Fund |VBMFX|?

If Vanguard Funds aren't available or the transaction fees are high, does your current brokerage offer index funds from Fidelity Investments or Charles Schwab?  Make a copy of my Funds, ETFs, and Brokerages spreadsheet; it lists pretty much every index mutual fund offered by Vanguard, Fidelity, and Schwab, so it will give you an idea of what to look for and a basis of comparison for what your current company offers.

If the comparison isn't favorable, it's probably time to switch.

2. What fees am I paying?

Vanguard's primary thesis is that fees matter: over long periods of time, high fees will do more to damage your investment returns than any other single factor.  If you're paying an annual mutual fund management fee (expense ratio) that are higher than the values you see for the index funds in my Funds, ETFs, and Brokerages spreadsheet, it's time to leave.

Also look out for annual account fees levied by your brokerage; Morgan Stanley, for instance, typically charges a 1% annual asset management fee on top of high fund expense ratios.  Vanguard doesn't have this fee, as long as you agree to electronic delivery of your account statements.

3. What will it cost me to move?

This is a relatively minor consideration; it's better to pay a transfer fee today than to pay much more on annual account fees and higher expense ratios over the long term.  Still, you should know what fees you will pay to make a move.  Check if any mutual funds you hold have a 'back-end sales load' (a fee to sell), and find out if your current brokerage charges account transfer (ACAT) or account closing fees.  Check here for transfer-out fees and here for IRA closing fees.  Vanguard won't charge you a fee to transfer in an account (and doesn't charge transfer-out fees, either!).

4. Will there be tax consequences?

If your money is in a tax-advantaged investment account like a 401(k), 403(b), or IRA, then you can move money around inside the account without triggering any taxes.  If it's in a regular taxable brokerage account, then you will owe capital gains taxes when you sell an investment if it has increased in value since you bought it.  Do your homework on how capital gains taxes work, or consult with a tax professional.

Moving To Vanguard

You can open an account with Vanguard here.  Once you've made the decision to move, the objectives are pretty simple:

  1. Move as much of your investments as possible into low-cost index mutual funds
  2. Minimize the fees and tax consequences of doing so
It's always an option to do a partial transfer, leaving your old account open with any investments that you don't want to (or can't conveniently) move or sell and moving the rest to Vanguard.

Taxes are (needlessly) complicated, so do your homework or consult a tax professional.

Consider this situation: you currently hold a bunch of individual stocks.  You want to sell these stocks and move into index mutual funds at Vanguard.  Should you sell the stocks first and then transfer the money to Vanguard, or transfer the stocks to Vanguard and then sell them?  The same question might apply to bonds, mutual funds, or whatever other investment you might be holding in your old account.

The order in which you proceed depends entirely on how the trading fees at Vanguard compare to those at your existing brokerage.  If your brokerage's trading fees are lower, trade and then transfer; if Vanguard's trading fees are lower, transfer and then trade.  When looking up your brokerage's fees, pay attention to any extra fees charged for 'broker-assisted trades'; if you call the brokerage instead of executing the trades yourself online, you may be charged an additional $25+ per trade.

For comparison, Vanguard’s stock and bond trading prices:

Assets Stocks, non-Vanguard ETFs Municipal Bonds US Bonds Commercial Paper
<$50k $7 for 25 trades/year; $20 after 0.2% (up to $250) None $50
$50k-500k $7 for all trades 0.2% (up to $250) None $50
$500k-1mm $2 for all trades 0.1% (up to $250) None $50

Vanguard categorizes the mutual funds of other companies into two groups: Transaction Fee (TF) funds and No Transaction Fee (NTF) funds.  Trading the NTF funds of other companies at Vanguard is fee-free. Search for your mutual fund holdings here to see which they are.

Assets TF Fund Fee
<$50k $35
$50k-500k $20
$500k-1mm $20
$1mm+ $8

When liquidating holdings in a taxable brokerage account, don't forget to consider the tax implications!

A (Potentially Helpful) Flowsheet

I have helped several friends and coworkers migrate some or all of their investments to Vanguard.  To help them get started on the transfer process, I created this flowsheet that summarizes the steps:

• Is the account taxable?
→ yes: STOP — must perform a tax analysis
→ no: continue

• Does the account contain individual stocks or bonds?
→ Are the stock and bond trading costs at the current brokerage lower than at Vanguard?
→ → yes: liquidate the individual bonds (if desired) and stocks at your current brokerage
→ → no: continue

• Does the account hold non-Vanguard Transaction Fee (TF) mutual funds?
→ Are the mutual fund transaction fees at your current brokerage lower than at Vanguard?
→ → yes: liquidate the TF mutual funds at your current brokerage
→ → no: continue

• Does the account hold exotic instruments like mortgage-backed securities or Unit Investment Trusts?
→ yes: STOP — must perform a careful analysis of these holdings
→ no: continue

• your tax-free account now contains: cash, No Transaction Fee (NTF) mutual funds, individual stocks, bonds and TF mutual funds (if not already liquidated)
→ initiate ACAT to Vanguard and wait for transfer to complete
→ liquidate NTF mutual funds
→ liquidate individual bonds (if desired) and stocks
→ purchase low-cost Vanguard index mutual funds to meet your desired allocation

Sound a little complicated and want a hand getting started?  Shoot me a message!  The advantages of investing with Vanguard are well worth the effort of setting up an account.