This Vanguard Chart Is Why Schwab Bought TD Ameritrade

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The big news while I was on vacation was that Schwab bought TD Ameritrade for $26 billion in an all-stock transaction (press release). Well, first Schwab shaved off 17% of TD Ameritrade’s value by cutting their trade commissions to zero, and then they bought AMTD at a multi-billion dollar discount to what it would have cost just a month earlier. Nice move.

Now that trade costs have gone to zero, and index fund expense ratios are also pretty much zero, what’s left? Vanguard funds now have a greater market share of all funds and ETFs than that of its next three biggest competitors combined, per this Marketwatch article:

That doesn’t include Schwab funds, which aren’t even on the chart.

Vanguard dominates because it has a long record of passing on virtually all of the benefits of scale to their clients. As they gathered more assets, they lowered their expense ratios, which helped them to better returns, which helped them gather more assets, and so on. Index funds may be a commodity now, but more people buy them from Vanguard than any else by far.

Vanguard is now moving into the portfolio advising turf formerly dominated by Schwab, Fidelity, and TD Ameritrade. The only way Schwab and TD Ameritrade can compete is through scale and creating a better total package for both advisors and retail customers. Can customer service and technology make enough difference that people will hold their funds and ETFs at Schwab?

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  1. They waited too long for my investment money, anyway. They needed to make some moves five or ten years ago before we were so firmly embedded with Vanguard and Fidelity ? Now there’s very little (or not nearly enough) incentive to split my portfolio or move the whole thing over to them, especially when I don’t have many needs as an investor. I just have to be able to buy and sell, for the most part these days. I suppose a financial advisor might come in handy further down the line when we’re managing withdrawals but even then I wouldn’t be looking for a long term relationship specifically for advice.

    • I agree, I don’t see myself moving from Vanguard either as my needs are minimal, but for example my parents are retiring and have big 401k/457/403b type plans that they want to rollover into an IRA and then get help with RMDs and withdrawals. I think there is a lot of money being fought over as 401ks turn into IRAs and post-withdrawal money. I initially thought Vanguard for sure and then I could help them manage it, but if they like talking to people on the phone for help, I’d rather have them deal with Fidelity reps honestly. On the other hand, I don’t want Fidelity talking them into an expensive managed portfolio product.

  2. I think it is safe to say that nobody can accuse Vanguard of having a GOOD total package for both advisors and retail customers. Their UIX has not changed since 1996. IMHO, it is ugly and challenging t o navigate and get information.

    Vanguard’s portfolio advising is priced for the 1%-ers. High minimum balances keep out the unwashed masses. This is why Betterment and Wealthfront have done so well. They provide portfolio advising for the masses.

    Full Disclosure: While I have tried the other recently-commission-free brokers, I’m migrating to Fidelity. This may change when Schwab implements fractional shares, as they announced recently.

    • This is why I like the competition from Schwab and Fidelity – it needs to be better for Vanguard to be motivated to get better as well.

      Vanguard is definitely going to start covering lower balances soon with their digital product. It’s just a matter of time.

  3. Fidelity’s customer service leaves much to be desired in my opinion. I’ve had too many instances where Fidelity representatives make mistakes or aren’t able to correct an issue. They also consistently try to promote their higher priced products, or when they hear I use Vanguard heavily, they tout their loss leaders in the hope that I will make a move.

    Vanguard, on the other hand, has been a better customer experience for me. The time or two they have made a mistake they have promptly corrected it when I contact them. Fidelity many times takes 2-3 times to get it right.

  4. I agree with most of the sentiments, the Schwab move on zero commissions impacted retail investors everywhere positively but their takeover of TD has negligible value once you are embedded with someone else. And I also prefer owning my Vanguard ETFs in my regular brokerage account not with Vanguard itself.
    However, I have to say, I couldn’t disagree with BJ more about Fidelity. I find everything about the company from the website experience, webinars, research, 24/7 Customer Service, their brick and mortar offices and problem solving skills etc…. meets or exceeds my expectations. I find on average that 2 out of every 5 calls are excellent, insightful and helpful, 2 out of 5 calls are useful but not brilliant and then there is the 1 out 5 where I know more then the person I’m talking to.

    • Fidelity’s customer service is horrible! They rank right up there with my cable company for worst customer service.

  5. Fidelity’s investment website is FRUSTRATING. I have KEOGH (solo 401K) and ROTH IRA accounts. Both accounts, you can not see year-to-date return, only total-return-gains. I’ve asked repeatedly for this feature but Fidelity insist “year-to-date-return” is a “special feature” and insist total-return-gain is enough. Just about every online brokerage firms and mutual funds give you year-to-date-return but not Fidelity. Frustrating with Fidelity

    I do love their no fees KEOGH account, but I hate that you need to send a physical check in order to make a deposit. I’ve asked multiple times about ACH desposit, Fidelity insists “layer of security” is the reason for a physical check. You can wire the money into your KEOGH account but my bank charges wiring fees. Trust me at some point Fidelity will loose that physical check. Sure enough it happened to me, took me 5 days to find the missing check no thanks to Fidelity.

  6. I moved my brokerage account to Vanguard when ETrade took over Capital One Investments (who took over Sharebuilder’s accounts); I was tired of my account moving. Vanguard has been great for brokerage and my Roth IRA, and just recently lowered all their trades to $0 fees. Before the first 25 per year were free.

    I just wish I had them for my 401k because my current fees are way too high. We were with Fidelity but moved to a lower-tier financial firm instead.

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