Edelman on Vanguard's SAI

[bigragu]

Hi Group

I listened to his show on 02/05/2011 1st hour(21 minutes in) and what he said astonished me.I am going to give you the link and I would love to have some feedback.

He states than Vanguard and other mutural fund companies are hiding fees of 1.4% in the SAI(Statement of Additional Information) that are not charged in ETF's.He stated the real cost of most Vanguard funds are around 2.5%.He states the expence ratio is only operating costs and does not include trading costs.If this was true we all should be in Vangaurd ETF's.He has to be wrong.If he is wrong he owes Vanguard an appoligy on the air.Here is the link to the podcast.See for yourself.I may have explained or interpreted incorectly.

http://www.ricedelman.com/cs/radio_show ... ws?id=1320

Thanks

[fluffyistaken]

There's no meaningful difference in performance of Vanguard mutual funds and corresponding ETFs, beyond the small differences in ERs. For example:
http://quote.morningstar.com/fund/chart ... %2C0%22%7D

[Ice-9]

This appears to have been discussed here:
viewtopic.php?t=68458

Edit: ...Although I don't think that thread came to an answer. User dbr posted a link to the SAI, but the link doesn't work. Anybody have an updated link?

Edit again: It's on the list of links for the prospectus of each individual fund

Edit again: No percentage given, but just short of $6 million paid in brokerage commissions on VTSMX (Total Stock Market) in 2009. Not sure how that translates to a significant percentage on a fund with $154.5 billion in total net assets.

[jhh9327]

Hi Group

I listened to his show on 02/05/2011 1st hour(21 minutes in) and what he said astonished me.I am going to give you the link and I would love to have some feedback.

He states than Vanguard and other mutural fund companies are hiding fees of 1.4% in the SAI(Statement of Additional Information) that are not charged in ETF's.He stated the real cost of most Vanguard funds are around 2.5%.He states the expence ratio is only operating costs and does not include trading costs.If this was true we all should be in Vangaurd ETF's.He has to be wrong.If he is wrong he owes Vanguard an appoligy on the air.Here is the link to the podcast.See for yourself.I may have explained or interpreted incorectly.

http://www.ricedelman.com/cs/radio_show ... ws?id=1320

Thanks

Just a sales trick to get the listener to assume something he didn't quite say. He didn't say Vanguard specifically has trading fees of 1.4%. He said that the industry average for trading fees is 1.4% and then uses that average figure when making the point that transaction costs are not included in an expense ratio. Since he uses Vanguard as his example, it gives the impression that must be Vanguard's transaction fees which is not what he said but is what he wants you to assume.

[Ice-9]

He states than Vanguard and other mutural fund companies are hiding fees of 1.4% in the SAI(Statement of Additional Information) that are not charged in ETF's.He stated the real cost of most Vanguard funds are around 2.5%.He states the expence ratio is only operating costs and does not include trading costs.If this was true we all should be in Vangaurd ETF's.He has to be wrong.If he is wrong he owes Vanguard an appoligy on the air.

One other point: Index funds should have fewer trades than their active counterparts, hence lower trading costs. So Vanguard's trading costs *should* be much lower than the average number he quotes.

[livesoft]

If there were an extra 2+% in fees added by Vanguard, then the total return of their index funds and ETFs would trail the index benchmarks by 2+% year-in and year-out. You can look for yourself if that is the case.

Here are some benchmarks (that is, these are not fund returns): https://personal.vanguard.com/us/funds/ ... arkreturns

[matt]

If Edelman's show is called "The Truth About Money", why is he lying about money?

[Rick Ferri]

Hi Group

I listened to his show on 02/05/2011 1st hour(21 minutes in) and what he said astonished me. I am going to give you the link and I would love to have some feedback.

He states than Vanguard and other mutural fund companies are hiding fees of 1.4% in the SAI(Statement of Additional Information) that are not charged in ETF's.He stated the real cost of most Vanguard funds are around 2.5%.

http://www.ricedelman.com/cs/radio_show ... ws?id=1320

Thanks

There is absolutely no truth to what Edeman is saying. He is just making stuff up. Let's cut through the hype and look at the facts; Vanguard ETF and open-end funds track their indexes within a few basis points (0.01%) every year. The numbers don't lie.

BTW, Edeman's firm charges cleints as much as 2% per year for this so-called investment advice.

Rick Ferri

[lazyday]

Often lies or intentionally misleading statements are based on hints of truth. Including it seems, this case.

Costs to a shareholder of a mutual fund include the stated ER, but also include other costs less easily found.

Commissions the fund pays to trade are not included in the ER, but can be found in the SAI, Statement of Additional Information. For a market weighted index fund like Vanguard uses, or for passively managed non-index funds like BRSIX and many DFA funds, most trading ideally is caused not by required changes from within the index structure, but by customers buying and selling the fund itself.

Commissions are generally much smaller than market impact costs and spread costs. When a large fund has to trade a significant amount of a stock, in many cases, the spread between the bid and asked amounts must be paid, or worse, the market price must be moved in order to trade enough shares. This is especially a problem for smaller cap stocks, many foreign shares, and any illiquid shares. Market impact and spread costs are not reported, and can be difficult to measure.

The higher the turnover (amount of trading), the less liquid the holdings of the fund, the greater the total assets of the fund, and the worse the fund is at trading, the worse these expenses will be. Judging the above can help some, the SAI can help some, and comparing a fund to its index over time can help some, especially if you know that it isn't taking extra risks in an attempt to overcome hidden trading costs. For example, a fund might hold a small amount of derivatives that pay 20% a year normally, but one year in a hundred will blow up and cause the fund a large loss. (If you think funds don't do anything like that, consider PCRIX that mimics a DJ commodity future index and TIPS return, with both hidden swap expenses and .75%ER expenses that disappear, and has insured bonds from Ford and GM in the past, among other things.)

[kenner]

Please explain this quote:

PCRIX ... has insured bonds from Ford and GM in the past, among other things.)

[GlennC]

Here's what goes on:

Brokers have various ways that they can skim from their clients. When you pay $10 with a retail broker, your actual costs are HIGHER than $10 because there are various tricks out there (internalization, price improvement / front running, etc.). This is one source of revenue. But maybe not all brokers engage in this behaviour.

Brokers also charge explicit commissions. This is the second source of revenue.

It is possible for brokers to overcharge a mutual fund- explicitly through commissions, or in a hidden manner by employing various tricks. Brokers might provide kickbacks to the mutual fund management company. If they provide "research" to the mutual fund manager, computers, office equipment, etc. then this must be disclosed in the SAI.

According to David Swensen's book, Vanguard is also guilty of taking kickbacks. See below

2- Is it 2.5%? If that were true, Vanguard would track the indices very poorly. He's blowing it waaaaaaaaaaaaaaay out of proportion.

*I haven't read Vanguard's SAI lately.

David Swensen's actual quote: "Only Vanguard, which does not market fund 'through intermediary brokers or dealers,' provides a safe haven for investors." -- Taylor 2-28-11

[yobria]

Depends on the fund. Their TSM fund isn't going to have anything near 1.4% in trading costs, their Intl Sm Cap very well may.

Commissions paid are in the SIA. Bid/ask haircut is unknown.

Nick

[porcupine]

If Edelman's show is called "The Truth About Money", why is he lying about money?

I don't think he's lying about money. He's only equivocating!

- Porcupine

[Allan Roth]

If Vanguard is hiding fees then why aren't the spreads in their index funds between actual return and the index, greater than the expense ratios. I don't want to link to my own column but I wrote a CBS MoneyWatch piece on an interview I did with him. He did not call me to thank me for the piece, which I certainly understand.

An Interview with Ric Edelman - Is High Cost Indexing an Oxymoron?

[bigragu]

Thanks

It looks like he may have telling about 10% of the truth.But It does seam like there are indeed other costs that are not in the ER.But they must be so small not to effect the returns between Vanguards ETF's and mutual funds.But doest there have to be trading costs effecting the ETF to keep it in line with the benchmark? ETF's have to be rebalanced right?

Thanks again

[RaleighStClaire]

Hi Group

I listened to his show on 02/05/2011 1st hour(21 minutes in) and what he said astonished me. I am going to give you the link and I would love to have some feedback.

He states than Vanguard and other mutural fund companies are hiding fees of 1.4% in the SAI(Statement of Additional Information) that are not charged in ETF's.He stated the real cost of most Vanguard funds are around 2.5%.

http://www.ricedelman.com/cs/radio_show ... ws?id=1320

Thanks

There is absolutely no truth to what Edeman is saying. He is just making stuff up. Let's cut through the hype and look at the facts; Vanguard ETF and open-end funds track their indexes within a few basis points (0.01%) every year. The numbers don't lie.

BTW, Edeman's firm charges cleints as much as 2% per year for this so-called investment advice.

Rick Ferri

Don't forget that he pushes insurance products down his clients' throats whether or not they need them.

[dbr]

Of course there are trading costs in Vanguard funds. I don't know how those could be different between an ETF class and a fund class of the same fund, but they may be and perhaps someone could explain that. Trading costs for large generalized index funds are quite minimal. Overall I would say about the same again as the ER.

However, if anyone is confused, it is absolutely the case that funds spend money to trade the fund investments and those costs are not reported in the ER.

[alec]

Hi Group

I listened to his show on 02/05/2011 1st hour(21 minutes in) and what he said astonished me.I am going to give you the link and I would love to have some feedback.

He states than Vanguard and other mutural fund companies are hiding fees of 1.4% in the SAI(Statement of Additional Information) that are not charged in ETF's.He stated the real cost of most Vanguard funds are around 2.5%.He states the expence ratio is only operating costs and does not include trading costs.If this was true we all should be in Vangaurd ETF's.He has to be wrong.If he is wrong he owes Vanguard an appoligy on the air.Here is the link to the podcast.See for yourself.I may have explained or interpreted incorectly.

http://www.ricedelman.com/cs/radio_show ... ws?id=1320

Thanks

He's obviously talking out of his a$$ because as well all know [right?] most of Vanguuard's ETFs [Total Stock Market, etc.] are just classes of the fund, just like investor and admiral shares. So these Vanguard ETFs bear the same brokerage commissions as the investor and admiral shares of the same fund.

[grabiner]

Commissions are generally much smaller than market impact costs and spread costs. When a large fund has to trade a significant amount of a stock, in many cases, the spread between the bid and asked amounts must be paid, or worse, the market price must be moved in order to trade enough shares. This is especially a problem for smaller cap stocks, many foreign shares, and any illiquid shares. Market impact and spread costs are not reported, and can be difficult to measure.

I believe Vanguard makes an attempt to measure these costs, with the purchase and redemption fees on index funds in illiquid markets. If the amount a fund loses to trading costs is 1% of the amount of purchases and redemptions, then Vanguard can charge a 1% purchase and redemption fee so that existing shareholders can track the index. These fees tend to decrease as the fund gets larger, because purchases and redemptions are more likely to match closely, reducing the total amount of trading needed.

(edited to fix quoting)

[LazyNihilist]

One reason to trust Vanguard more than other mutual funds out there is because of how Vanguard is structured. It is owned by the funds itself.

They are serving the shareholders in the Mutual Fund itself, and not the management company. This is what makes me feel so comfortable with it.

[Taylor Larimore]

Glenn:

You wrote:

According to David Swensen's book, Vanguard is also guilty of taking kickbacks.

This is not what David Swensen wrote. This is what Mr. Swensen wrote (page 275) which is the exact opposite of what you claim:

"Payments for preferrerd product placement taint most of the mutual fund industry's largest players. Of the five largest mutual-fund groups, four engage in pay to play.

The coldly legalistic prospectus language, extracted from the mutual funds' Statements of Additional Information and reproduced in Table 9.1, tells a chilling tale of payola for placement.

Fidelity, Capital Group (American Funds), AIM/Invesco, and Pimco play the dirty game. Only Vanguard, which does not market fund 'through intermediary brokers or dealers,' provides a safe haven for investors."

Please edit your post.

Thank you.

[fishnskiguy]

Since inception in April 1994, Vanguard's Total Stock Market fund has returned 8.55% per year. The Spliced Total Stock Market Index has returned 8.69%. The .14% difference MUST include all costs plus tracking error, if any. With an expense ratio of .18%, trading costs look to be less than a positive tracking error.

Case closed.

Chris

[KyleAAA]

Just a sales trick to get the listener to assume something he didn't quite say. He didn't say Vanguard specifically has trading fees of 1.4%. He said that the industry average for trading fees is 1.4% and then uses that average figure when making the point that transaction costs are not included in an expense ratio. Since he uses Vanguard as his example, it gives the impression that must be Vanguard's transaction fees which is not what he said but is what he wants you to assume.

Bingo

[lazyday]

Please explain this quote:

PCRIX ... has insured bonds from Ford and GM in the past, among other things.)

kenner,

I haven't kept up with PCRIX lately, but Chip here or at Morningstar Diehards, and Raddr at Raddr Forums, both used to do regressions on PCRIX vs DJ CCF index and TIPS, and found that PCRIX tracked very well. It was curious that the expense ratio didn't show up, nor did the hidden costs of derivatives used to get exposure to CCFs.

All one had to do was look at the Annual Report to find out why. The fund was investing not only in TIPS and swaps to obtain CCF exposure, but also Russian Bonds, Credit Default Swaps for Ford and GM, and dozens of other exotic instruments. This was well within the prospectus; I'm not saying Pimco was doing anything wrong. Just that to understand the performance behind the chart or regression, you need to look at fund holdings, and maybe the prospectus.

PCRIX probably isn't a bad offender, just the first one to come to mind that I'm a little familiar with. I do think it's possible for a fund to use similar but less obvious techniques to hide expenses, taking risks that shareholders may not notice, or want. As Swensen says (about something similar) "get a little, get a little, get a little, lose a lot". Could be a risk that makes sense for a not-very-ethical fund manager trying to compete, but not me as a shareholder.

[lazyday]

Depends on the fund. Their TSM fund isn't going to have anything near 1.4% in trading costs, their Intl Sm Cap very well may.

yobria,

Perhaps in a really bad month, Intl SC annualized trading costs might be 1.4%? Just guessing.

I don't recall exact figures, but remember being pleasantly surprised how close the fund tracked its index so far, compared to studies that say about 1% trading cost just for US small cap, or for foreign large. (depending on the study. sometimes higher!)

Vanguard tries very hard to minimize trading costs, including using cross trading, where buys and sells are offset against each other in house.
Purchase and redemption fees help too of course.

[lazyday]

I believe Vanguard makes an attempt to measure these costs, with the purchase and redemption fees on index funds in illiquid markets. If the amount a fund loses to trading costs is 1% of the amount of purchases and redemptions, then Vanguard can charge a 1% purchase and redemption fee so that existing shareholders can track the index. These fees tend to decrease as the fund gets larger, because purchases and redemptions are more likely to match closely, reducing the total amount of trading needed.

grabiner,

Good point. That makes sense that the purchase and redemption fees are calculated to offset trading costs, in fact I think Vanguard might say so, or at least say that is their purpose.

I meant that it's hard for us to measure Vanguard's market impact and spread costs, not for Vanguard to.

[lazyday]

One reason to trust Vanguard more than other mutual funds out there is because of how Vanguard is structured. It is owned by the funds itself.

They are serving the shareholders in the Mutual Fund itself, and not the management company. This is what makes me feel so comfortable with it.

Absolutely, I agree entirely.

Even with Vanguard, I still read up on funds before buying, and afterwords occasionally read a prospectus and annual reports. Not wise to blindly trust 100%.

But basic trust in the company is so important, as is the better alignment of interests with shareholders because of the ownership structure.

[Allan Roth]

I think I'm going to write about this.

[pkcrafter]

He stated the real cost of most Vanguard funds are around 2.5%.

Well, finally the truth has come out. The reason this cost does not show up is that for years Vanguard has been actively managing their index funds to provide a 2.5% over index return.
YES, I'M KIDDING!


Paul

[1210sda]

ICE-9 wrote:

"Edit again: No percentage given, but just short of $6 million paid in brokerage commissions on VTSMX (Total Stock Market) in 2009. Not sure how that translates to a significant percentage on a fund with $154.5 billion in total net assets. "

Based on these numbers, it is less than 4/1,000's of a percent. I can live with that.

These guys (Edelman) are great salesmen......Thank you Thank you Thank you Bogleheads. What a group.

1210

[Rager1]

I think I'm going to write about this.

I'd love to read what you discover.

Ed

[Rager1]

If Vanguard is hiding fees then why aren't the spreads in their index funds between actual return and the index, greater than the expense ratios. I don't want to link to my own column but I wrote a CBS MoneyWatch piece on an interview I did with him. He did not call me to thank me for the piece, which I certainly understand.

An Interview with Ric Edelman - Is High Cost Indexing an Oxymoron?

Since you didn't want to provide a link to your own column, I thought I would provide it so folks can read it.

http://moneywatch.bnet.com/investing/bl ... moron/720/

Ed

[nisiprius]

If Vanguard is hiding fees then why aren't the spreads in their index funds between actual return and the index, greater than the expense ratios.

The Morningstar charts (and everyone else's charts and figures for index investing) are the returns you'd get from the index, with no costs at all. If we chart

Vanguard 500 Index, VFINX, (ER 0.18%, unknown trading costs)
The index itself, (ER 0.0%, zero trading costs),
The Invesco S&P 500 index fund, SPIAX (ER 0.61%, unknown trading costs)



we see that a 13 year period:

VFINX lagged the index by $152 / $16733 = 0.91% = 0.07% annualized
SPIAX lagged the index by $1230 / $16733 = 7.35% = 0.59% annualized

I don't see how it is possible to believe anything other than that the performance of index funds is in good accord with their expense ratios... and that, in an index fund (where, of course, turnover is low), the effect of trading costs must be negligible.

John C. Bogle has, of course, been among the more vocal critics of high trading costs.

[lazyday]

An Interview with Ric Edelman - Is High Cost Indexing an Oxymoron?
http://moneywatch.bnet.com/investing/bl ... moron/720/

Allan, nice to see you find some positive things to say, instead of pure negativity, especially for a piece so in the open--published on moneywatch. You still get perhaps the most important point across.

Ric Edelman is a smart and articulate adviser who is one of the few that will cater to investors with portfolios as small as $50,000. Edelman should be applauded for both his transparency in fees and for helping this consumer stay the course, when the market plunged.

While I think that paying 2.29 percent to index is better than paying the same for an active portfolio, high cost indexing is an oxymoron. My investing mantra is “costs matter,” and I don’t think one can have a good portfolio when costs are over 1.00 percent.

[Midwest_Investor]

I listened to the podcast under discussion. As a math oriented person, I have a huge problem with Mr. Edelman’s statements. Ric Edelman says, “……[Vanguard] will incur additional trading costs….. ….the industry average according to the most recent study done on the subject by a bunch of universities is 1.4% per year. So in addition to the 0.6%, add another 1.4%.”

Mr. Edelman blindly takes the average for the industry and makes the assumption that Vanguard’s trading fees equals this 1.4%. That’s just wrong. He presents no evidence that Vanguard’s fee is indeed 1.4%. He simply takes the average for the industry and makes a huge assumption. Why would he assume that a low cost index fund incurs the same charge as the industry's average? He doesn’t take into account that the Vanguard fee may be much lower (or higher for that matter) than the industry standard, which is clearly incorrect on his part.

[MIARay]

There is absolutely no truth to what Edeman is saying. He is just making stuff up. Let's cut through the hype and look at the facts; Vanguard ETF and open-end funds track their indexes within a few basis points (0.01%) every year. The numbers don't lie.

BTW, Edeman's firm charges cleints as much as 2% per year for this so-called investment advice.

Rick Ferri

Agreed. And why the need to charge investors such outrageous fees for such small accounts Ric? There's no tax management going on here, very BASIC financial advice, and the investors are simply being placed into model portfolios where block trades are the norm for both big and small investors.

Mr. Edelman is what you call a true wolf in sheep's clothing!

[Random Musings]

Edelman's EMAP schedule (annual)

First $150,000 2.00%
Next $250,000 1.65%
Next $350,000 1.25%
Next $250,000 1.00%
Next $2 million 0.75%
Next $7 million 0.60%
Next $15 million 0.50%

So, in addition to the usual expense ratio's, the additional EMAP charge is as follows for a portfolio size of:

750,000 1.53%
1,000,000 1.40%
3,000,000 0.97% (hey, it broke the 1% barrier)
10,000,000 0.71%

Seems a little expensive. But Barron's gave him a #1 recommendation, was it based on net returns risk adjusted or marketing?

No thanks.

RM

[Rick Ferri]

Edelman's EMAP schedule (annual)

750,000 1.53%
1,000,000 1.40%
3,000,000 0.97% (hey, it broke the 1% barrier)
10,000,000 0.71%

Seems a little expensive. But Barron's gave him a #1 recommendation, was it based on net returns risk adjusted or marketing?

RM

1.4% on $1 million isn't expensive, it's outrageous.

The Barron's list has nothing to do with performance or investment strategy, or anything having to do with investing. Barron's really doesn't care who's on their list or what the advisor does or says. The list is just content to put out there.

Typically, to get in a magazine's list like Barrons it means 1) you contacted the publication and ask to be on the list, 2) complete a short questionnaire about your firm that the publisher NEVER checks, 3) you move up the list by showing fast growth in the number of clients or assets (whether it's true or not is irrelevant).

I've been contacted by numerous publications that are putting together "The Best Advisors" lists, but I decline most because they want advertising dollars to go along with their recommendation. Last week, a magazine asked me to get Vanguard or Schwab to advertise with them and my reward would be top billing in an article titled "Meet the Country's Best Advisors."

Rick Ferri

[lazyday]

Last week, a magazine asked me to get Vanguard or Schwab to advertise with them and my reward would be top billing in an article titled "Meet the Country's Best Advisors."

[Random Musings]

Rick Ferri wrote:

1.4% on $1 million isn't expensive, it's outrageous.

I know. That's why I poked fun at the 1% barrier being broken once a client of that firm has $3MM in assets.

The question I posed (returns or marketing) was just a stab at humor - hard to get good returns with such a high AUM hurdle compared to other, lower, ethical cost advisors.

That's also why I consider Barron's to be little more than potential bird cage lining material. Although at one time, when the internet wasn't around, it did provide data for investors.

RM