Vanguard Leads The Way With Super-Low Fund Fees

Caroline Maxwell, InvestorsOffshore.com

28 March 2001

With the markets currently in the doldrums, and their customers increasingly voting with their feet, mutual fund companies are being forced to reassess the amounts they charge in mutual fund fees as expenses become a bigger issue for investors.

The majority of US equity funds average annual expenses of approximately 1.5%, while bond fund fees tend to lurk at around 1%. However, experts are predicting that soon, many fund companies will follow the example of the Vanguard Group, which has created a new fund share class with lower fees for retail investors. The Group launched its low cost Admiral Class shares on seven of its index funds in November of last year, and has recently substantially extended this offering, which now encompasses an additional thirteen bond funds, and will be launched for many of the company's actively managed funds later this year.

So far, Vanguard clients have converted approximately $22 billion in shares to the new fee class, and Geoff Bobroff, a Rhode Island based funds consultant believes that other fund groups will have to follow Vanguard's lead, or face losing their existing customers. ' The Fidelities and American Centuries of this world will be watching very closely to see how Vanguard does this,' according to Mr Bobroff. 'If we are at a sales plateau in the industry, everyone will start shifting to retention. That's what Vanguard has done here.'

There are concerns that high minimums mean that many investors won't qualify for Admiral Class shares; new share account holders must have at least $250,000 invested in a fund account, and smaller shareholders must have a minimum of $50,000 invested, and must have held it for a minimum of ten years. For accounts at least three years old, the required minimum is $150,000. However, experts at Morningstar, the fund analysis company, believe that although the required minimum investments are reasonably high, there will still be no shortage of qualified investors ready, willing, and able to take advantage of the cut-rate fees.

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