Vanguard Merged Brokerage Account Review: Pros and Cons

When you open an account with Vanguard, there are two different account options. First is a mutual fund account which only holds Vanguard mutual funds. Second is a brokerage account that can hold individual stocks, ETFs, individual bonds, and non-Vanguard mutual funds. Over the past couple of years, Vanguard has been slowly rolling out a merged option where everything is moved inside the brokerage account. This for both IRAs and taxable accounts.

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Eligibility. If you are an existing Vanguard customer, you can see if you are automatically eligible for this “upgrade” via Vanguard.com/accountupgrade. If you only have Vanguard mutual funds, you will be required to open a new brokerage account. If your accounts are not listed, you can also contact Vanguard customer service and request to be upgraded manually. I am not sure how they decide whether to grant this request, but I just asked last week and was approved the next business day.

Process. The upgrade process was fast and painless, at least for me. You have to e-sign some documents approving the change and acknowledging the loss of certain features (noted below). By the next business day, all of your Vanguard mutual funds will be transferred “in-kind” into the brokerage account. Nothing is sold and there will be no tax consequences. As far as I can tell, all of my cost basis and other historical information transferred over smoothly. The cost basis calculation method should also carry over (but you may want to double-check). They’ve been merging accounts since 2013, so it appears most of the kinks have been ironed out.

Each merged brokerage account has one money market settlement fund, for example the Vanguard Prime Money Market fund. This is where you will receive the proceeds from transactions like ETF or stocks sales.

Vanguard says that for “most people” there won’t be any change in features. But there are some important changes to note, and I’ve tried to separate them into pros and cons.

Pros

  • Simplification at no additional cost. Your online account view is simplified. Your statements are simplified. There is no cost to switch. There is no change in your commission structure.
  • Less tax paperwork. For the tax year of your upgrade, you’ll receive separate tax forms for your mutual fund accounts and brokerage accounts. Starting the first full tax year after you upgrade, you’ll receive a single tax form for each brokerage account. One less 1099-B and 1099-DIV sounds good to me.
  • Possibly quicker funds availability. After the merge, you will be able to sell a brokerage asset (i.e. ETF) and then use the proceeds to buy a Vanguard mutual fund on the same day. Previously, you had to wait 4 days for the brokerage funds to settle first to be available for use in the mutual fund account.
  • SIPC coverage of Vanguard mutual funds. Vanguard mutual funds were previously not held in a brokerage account, so no SIPC coverage. (It technically wasn’t necessary for mutual funds.) Now everything is inside a brokerage account, so everything is covered by SIPC. Vanguard also has separate insurance that exceeds the SIPC maximums.

Cons / Concerns

  • Less flexible checkwriting. With the mutual fund accounts, you could get a separate checkbook for each of your eligible mutual fund accounts. I could get checks that withdrew directly from my Vanguard Limited-Term Muni Bond fund, or Vanguard Total US Bond fund, or any money market fund. But now, you will only get a single checkbook for each brokerage account, and it will only pull from your settlement account (plus another fund as backup).
     
    Vanguard will “do our best to honor any outstanding checks written on a Vanguard mutual fund that are presented for payment within 45 days after you’ve transferred your Vanguard funds into a brokerage account.”
  • Less flexible dividend and capital gains distributions. With a merged account, your only options for fund distributions are either automatic reinvestment into the same fund, or cash into your settlement fund. You’ll no longer be able to receive Vanguard fund distributions directly by check, by automatic transfer to your bank account, or by automatic reinvestment into another Vanguard fund.
  • Direct deposit not available. You can no longer have your paycheck direct deposited into your Vanguard brokerage account. You can still set up a manual or recurring transfer from your linked bank account to Vanguard. It just can’t come directly from your employer, so that can be a loss of convenience.
     

    I believe you can regain this feature if you sign up for a VanguardAdvantage account (their cash management option that include a debit card and online billpay). However, this is only available to clients with at least $500,000 of assets with Vanguard.

If any of these “cons” affect your current settings, Vanguard should alert you during the upgrade process. However, I think it’s good to know this stuff even if you aren’t using those features at the moment. I also tried opening a new Vanguard account from scratch, and it appears that new clients are still having two separate accounts opened for them (mutual fund and brokerage). I wonder why?

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Comments

  1. Great write up on this. I also found it unique that they don’t market a traditional broker despite the fact that they do offer it. I did some research several months back and found that they offer a very dated “trading portal” but were slowly working to make updates. I was excited in hopes that just like their mutual funds, that they would offer super low commissions. I can’t recall exactly but it was something crazy cheap like $1/trade for accounts over 500k all other accounts it was something close to $5 a side on most equities and ETF’s. Not the cheapest out there but not bad either. If someone has the exact commission rates, feel free to post since I’m just going off memory.

  2. Ken somwhere in Georgia says:

    I always found it odd that Vanguard did not let you buy their own mutual funds through a brokerage account held with them. Several years ago my wife opened a brokerage account with them to be able to buy some stocks with funds from a 401-K rollover and assumed she would be able to invest in Vanguard funds if she chose to do so. She was kind of stumped — and miffed — when she found out she couldn’t do so. I’ve always liked Vanguard because of their approach to controlling investment costs, but is seems that they are only now catching with competitors — most notably Fidelity — in some of their account options and offerings. They probably have lost a significant amount of business in the past due to customers going elsewhere to get services like cash management accounts, etc.

  3. I checked eligibility online & no account listed. I called to upgrade my accounts, but only my taxable account is eligible. My Roth IRA is not. Not sure why.

  4. Is it possible to convert the Vanguard mutual funds to their equivalent ETFs with no tax consequences? I want to use the Vanguard ETFs to write covered calls and collect premiums

  5. Jonathan, I merged my Vanguard accounts into one single brokerage account. While there are benefits to doing so, one big “con” was I lost the ability to “park” my Roth IRA contribution for the year in the Prime Money Market account and then have auto-transfers to the funds in my Roth IRA as part of a dollar cost-averaging strategy. Now, I would have to set up auto debits from my checking into each fund to perform DCA, so I lose the tax deferral on the entire amount from the get go. Not a huge deal, but annoying nonetheless.

  6. I recently did the upgrade of all of our accounts to move Vanguard funds to the respective brokerage accounts. Beside some minor issues (dividends for some funds that had payment to settlement account selected that were earned through the date of conversion were instead reinvested; confirmation says FIFO for funds for which specific share identification was selected for cost basis option), there was a major problem. As of now, I no longer have access to the Electronic Bill Pay tab. It tells me to open a VanguardAdvantage account even though I already have one. I have an important bill to pay and can’t do it. I find this amazing that this bug would be there 2 years after this conversion process started.

  7. I too converted to Brokerage…..but now if I experience any issues I can not talk with a broker/anyone. Phone wait times are usually greater than 60 minutes. On Mondays it is impossible to get through. Okay, great…but what happens when the Vanguard online site goes down???? That is right everyone is calling and no one gets through. I found this site while looking for a new place for my monies. Because of tax considerations it will take years for me to close all of my accounts. I do not need more people to join Vanguard. Vanguard was once a great place to invest your money but 2016 has seen Vanguard going downhill.

  8. Hi there!

    I’m trying to decide if this is the right decision for me. I’m not very financially savvy, yet, so any help in understanding some common scenarios in which merging the brokerage and money market accounts would or would not make sense would be so very much appreciated.

    Even if the examples are not exact to my situation, I am sure they will be helpful.

    Thank you!

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