Vanguard: "Your Account Needs to be Transitioned"

[MD8056]

First time poster, long time lurker. My background: male, age 63, recently retired, Vanguard customer for 27 years, IRAs of 1.3M+

I just received this email from Vanguard Flagship Services titled "YOUR ACCOUNT NEEDS TO BE TRANSITIONED". I've never had such a message from them before. They are telling me I need to switch my current all-mutual-fund IRAs into ETFs held in their brokerage platform, as a cost saving measure for the company. I am completely satisfied with MFs and have no desire to convert to ETFs.

I realize that SPIC would cover me for up to $500K in a brokerage account, but it is my understanding that this protection is only for brokerage fraud or failure. As I see it, Vanguard is wanting me to transfer my account into an environment where, in effect, I will assume 1.3M of fraud/failure risk with only 500K coverage. With my current account arrangement I have no such brokerage risk (although I understand other risks are involved, as with all investments). Their request, if I must comply with it, will compel me to transfer 800K away from Vanguard to another company or companies. Am I missing something?

Has anyone else received such an email? What's their next step if I just ignore it?

[Mike Scott]

Vanguard has been asking people to transition to their new system for some time. You can probably still wait for a while longer but the new system is OK too. You might recheck your email about the mutual fund to etf conversion... this seems unlikely.

[nisiprius]

There are reasons not to like this, but it's not as bad as you think.

Mutual funds have no backstop in the form of any government guarantee, from SIPC or anybody else. If you do not currently have any brokerage accounts at Vanguard, if you have nothing but Vanguard mutual funds, you will find that your statement does not say anything on it anywhere about SIPC protection. You have none. The protection you do have in the mutual funds is the protection provided by the fairly strict regulations of the Investment Company Act of 1940. It says, for example, that Vanguard itself can't touch the actual assets within the fund, they are held by an independent custodian.

When you hold a mutual fund or a stock, you have no actual insurance. If you buy Enron stock and it goes to zero due to fraud, you lose your money.

Vanguard is forcing you to hold a mutual fund within their brokerage.

When you hold any asset in a brokerage, it adds a second layer of risk. The risk has to do with bad custodianship by the broker. For example, you might send the broker money to buy a stock, and they might pocket the money, not buy the stock, and send you a fraudulent confirmation and statement that says they've bought it for you. (Something like this really happened to some of Madoff's clients). They might also sincerely mean to buy the asset, but bungle their recordkeeping. This really happened in the 1970s and is one of the reasons why the SIPC was formed.

So, holding an asset in a brokerage adds some risk. The SIPC insurance offsets that risk and only that risk. If your account statement says you own some Enron stock and the brokerage didn't buy that stock and earmark it for you, the SIPC covers that. If Enron stock becomes valueless due to fraud, that's not the SIPC's problem.

Now, over $500,000, at Vanguard and every other brokerage I've used, the same risk SIPC covers are covered by private insurance that goes up to some much higher amount. The details for Vanguard are here:

Securities in your brokerage account are held in custody by Vanguard Brokerage Services, a division of Vanguard Marketing Corporation. Vanguard Marketing Corporation is a member of the Securities Investor Protection Corporation (SIPC), which protects securities customers of its members up to $500,000 (including $250,000 for claims for cash). Explanatory brochure available upon request or at sipc.org.

To offer greater protection and security, Vanguard Marketing Corporation has secured additional coverage from certain insurers at Lloyd's of London and London Company Insurers for eligible customers with an aggregate limit of $250 million, incorporating a customer limit of $49.5 million for securities and $1.75 million for cash. Coverage provided by SIPC and certain Lloyd's of London and London Company Insurers does not protect against loss of market value of securities. The policy provided by certain Lloyd's of London and London Company Insurers is subject to its own terms and conditions.

To tell the truth I don't understand that "aggregate limit of $250 million," though.

Anyway, it is reasonable to be irritated by all this, but, no, you are not transitioning from $1.3 million of coverage to $500,000 of coverage. You are transitioning from

a) no coverage for fraud within the mutual fund itself to
no coverage for fraud within the mutual fund itself. No change.

You are transitioning from
a) No risk of bad custodianship by a brokerage because no brokerage is involved, to
b) Risk of bad custodianship, which is countered by $500,000 of SIPC protection, and the rest of it covered by Lloyds of London protection.

I have to say that in Ye Old Days, when Vanguard mutual funds could not be held within the brokerage account, people complained about that. The issue was that within the brokerage, you could do a same-day "sell-to-buy" between any non-Vanguard funds--sell a Fidelity fund to buy an Invesco fund or whatever. But if you wanted to buy a Vanguard fund, you had to wait several days for the sale to settle before you could use the proceeds to buy the Vanguard fund. People complained, justifiably, that (in this specific situation) treated you worse if you were buying a Vanguard fund than if you were buying a non-Vanguard fund. This didn't exist at Fidelity, nor, I think, at Schwab. So people kept asking why Vanguard wasn't doing the same things its competitors are doing.

[KingRiggs]

First time poster, long time lurker. My background: male, age 63, recently retired, Vanguard customer for 27 years, IRAs of 1.3M+

I just received this email from Vanguard Flagship Services titled "YOUR ACCOUNT NEEDS TO BE TRANSITIONED". I've never had such a message from them before. They are telling me I need to switch my current all-mutual-fund IRAs into ETFs held in their brokerage platform, as a cost saving measure for the company. I am completely satisfied with MFs and have no desire to convert to ETFs.

They will NOT require you to change to ETFs. Your current holdings will not be affected in the least, other than that they will be held in a brokerage account.

Many, many posts regarding this transition. Most have been trouble-free.

[telemark]

This is a new and peculiar use of the word need, meaning roughly that Vanguard really really wants all its customers to use brokerage accounts. I have been ignoring this for several years now, with no consequences other than having to click through yet another plea when I sign in.

[joe8d]

This is a new and peculiar use of the word need, meaning roughly that Vanguard really really wants all its customers to use brokerage accounts. I have been ignoring this for several years now, with no consequences other than having to click through yet another plea when I sign in.

Same here.

[MP123]

Now, over $500,000, at Vanguard and every other brokerage I've used, the same risk SIPC covers are covered by private insurance that goes up to some much higher amount. The details for Vanguard are here:

Securities in your brokerage account are held in custody by Vanguard Brokerage Services, a division of Vanguard Marketing Corporation. Vanguard Marketing Corporation is a member of the Securities Investor Protection Corporation (SIPC), which protects securities customers of its members up to $500,000 (including $250,000 for claims for cash). Explanatory brochure available upon request or at sipc.org.

To offer greater protection and security, Vanguard Marketing Corporation has secured additional coverage from certain insurers at Lloyd's of London and London Company Insurers for eligible customers with an aggregate limit of $250 million, incorporating a customer limit of $49.5 million for securities and $1.75 million for cash. Coverage provided by SIPC and certain Lloyd's of London and London Company Insurers does not protect against loss of market value of securities. The policy provided by certain Lloyd's of London and London Company Insurers is subject to its own terms and conditions.

To tell the truth I don't understand that "aggregate limit of $250 million," though.

I don't either. That would seem to be far too low of an aggregate limit for Vanguard which has how many trillions in accounts? But maybe there's something we're not understanding.

In my case the transfer to the new brokerage format was completely uneventful and very fast.

[SpringMan]

If you have authorization to trade for a spouse, you may have to submit new paperwork. They lost my authorization during transition. Requires a notarized signature.

[TravelGeek]

If you have authorization to trade for a spouse, you may have to submit new paperwork. They lost my authorization during transition. Requires a notarized signature.

I think for the MF account it simply required an online action to grant permissions. No paperwork, no signature, definitely no notarized anything.

[talzara]

To tell the truth I don't understand that "aggregate limit of $250 million," though.

If Vanguard Brokerage Services loses $1 trillion of customer securities above the SIPC limit, then Lloyd's of London will only pay $250 million.

I don't either. That would seem to be far too low of an aggregate limit for Vanguard which has how many trillions in accounts? But maybe there's something we're not understanding.

That is exactly what it means. No insurance company can possibly provide $1 trillion in coverage. Nothing short of a government bailout can insure against that kind of risk.

Fidelity's excess policy has a $1 billion aggregate limit:

In addition to SIPC protection, Fidelity provides its brokerage customers with additional "excess of SIPC" coverage. The excess coverage would only be used when SIPC coverage is exhausted. Like SIPC, excess protection does not cover investment losses in customer accounts due to market fluctuation. It also does not cover other claims for losses incurred while broker-dealers remain in business. For example, fraud claims would not be covered if the brokerage firm was still in operation. Total aggregate excess of SIPC coverage available through Fidelity's excess of SIPC policy is $1 billion.

https://www.fidelity.com/why-fidelity/s ... r-accounts

[GrowthSeeker]

When they started, AFAIK, the only type of account was a MF account. Later, they added brokerage accounts. Now they want to decrease the overhead of managing two types of accounts.

Switching from MF account-type to brokerage account-type does NOT mean you have to sell Funds and buy ETFs. Just keep holding the same Funds if you wish.

I'm not sure there is even a single downside to switching to a brokerage account (maybe there is and I just don't know about it)

[hirlaw]

Does Vanguard continue to provide you with your pre-transition cost basis?

[Thesaints]

When they started, AFAIK, the only type of account was a MF account. Later, they added brokerage accounts. Now they want to decrease the overhead of managing two types of accounts.

Switching from MF account-type to brokerage account-type does NOT mean you have to sell Funds and buy ETFs. Just keep holding the same Funds if you wish.

I'm not sure there is even a single downside to switching to a brokerage account (maybe there is and I just don't know about it)

In my MF account I can instruct Vanguard to withdraw money from my bank account and buy shares of VTSAX fund.
In the brokerage account, my wife has to instruct Vanguard to withdraw money from her bank account to be deposited in the settlement MM fund AND to exchange shares of the settlement MM fund with shares of VTSAX.

[MP123]

Does Vanguard continue to provide you with your pre-transition cost basis?

Yes. But if you use Quicken you'll need to fix it manually.

[HomeStretch]

In my MF account I can instruct Vanguard to withdraw money from my bank account and buy shares of VTSAX fund.
In the brokerage account, my wife has to instruct Vanguard to withdraw money from her bank account to be deposited in the settlement MM fund AND to exchange shares of the settlement MM fund with shares of VTSAX.

In my brokerage account, I buy shares of VTSAX in the same way you do in your MF account.

[CalculatedRisk]

In my MF account I can instruct Vanguard to withdraw money from my bank account and buy shares of VTSAX fund.
In the brokerage account, my wife has to instruct Vanguard to withdraw money from her bank account to be deposited in the settlement MM fund AND to exchange shares of the settlement MM fund with shares of VTSAX.

In my brokerage account, I buy shares of VTSAX in the same way you do in your MF account.

Same for my brokerage account. I can directly buy vanguard mutual funds using external bank accounts.

[clown]

We transitioned a few months back with absolutely no problems, and were able to own MFs in the brokerage account. I have also bought some new MFs from within the brokerage account. My reading of the tea leaves -- having one system to maintain is cheaper than maintaining two platforms. Vanguard saves money, which is passed on two its owners (the investors themselves, there is no corporate ownership as with FIDO for example) in the form of lower ERs and lower transaction costs. If you want to keep what you have, ignore their request.

[grandmacassie]

I just called Vanguard 5 minutes ago b/c I had received the same message. I was prepared to transition, but had a few questions. My Flagship rep told me transition was totally optional. I elected not to transition because I don't have any individual stocks/ETFs and my set-up now works perfectly for me. So the term "need" is not the same as "require".

[Thesaints]

In my MF account I can instruct Vanguard to withdraw money from my bank account and buy shares of VTSAX fund.
In the brokerage account, my wife has to instruct Vanguard to withdraw money from her bank account to be deposited in the settlement MM fund AND to exchange shares of the settlement MM fund with shares of VTSAX.

In my brokerage account, I buy shares of VTSAX in the same way you do in your MF account.

Same for my brokerage account. I can directly buy vanguard mutual funds using external bank accounts.

How do you do that ?
When she wants to buy the only choice in the pulldown menu is the mm fund.
To be accurate, this refers to a backdoor roth, so the operation is exchanging shares from a traditional ira (mm fund) into her roth ira (vtsax). Can’t do directly into vtsax; the choice is not available.

[GrowthSeeker]

In my MF account I can instruct Vanguard to withdraw money from my bank account and buy shares of VTSAX fund.
In the brokerage account, my wife has to instruct Vanguard to withdraw money from her bank account to be deposited in the settlement MM fund AND to exchange shares of the settlement MM fund with shares of VTSAX.

In my brokerage account, I buy shares of VTSAX in the same way you do in your MF account.

Same for my brokerage account. I can directly buy vanguard mutual funds using external bank accounts.

How do you do that ?
When she wants to buy the only choice in the pulldown menu is the mm fund.
To be accurate, this refers to a backdoor roth, so the operation is exchanging shares from a traditional ira (mm fund) into her roth ira (vtsax). Can’t do directly into vtsax; the choice is not available.

It has been a while since I saw that page, but I think one requirement is that you have a linked external bank account.
Then you say you want to buy so many shares or dollars worth of, say, VTSAX. Then when it says: Where is the money coming from? the external bank account should be one of the options.

[rkhusky]

How do you do that ?
When she wants to buy the only choice in the pulldown menu is the mm fund.
To be accurate, this refers to a backdoor roth, so the operation is exchanging shares from a traditional ira (mm fund) into her roth ira (vtsax). Can’t do directly into vtsax; the choice is not available.

Under my login, which doesn't have a linked bank account, but has both mutual fund and brokerage accounts, I go to the Balances and Holdings page from the My Accounts drop down menu. On the RHS, for each mutual fund, there are links for Buy Sell Exchange. Next to my Prime Money Market, there is also a link for Bank transfer. When I click the latter, it asks me to set up a linked bank account. If I instead click Buy and put in an amount, it asks where is the money coming from - Add a new bank, Send Vanguard a check, or Exchange from another fund (if you have a linked bank account, your only option is a purchase from the linked bank). Choosing Bank transfer for the money market account gives a different screen, than for Buy, but it does basically the same thing. There is no difference between mutual fund and brokerage accounts for these actions. If I had a linked bank account, I could select that account and Vanguard would debit my bank account and buy the number of shares or amount that was entered. This is possible for any of the mutual funds.

[nisiprius]

To tell the truth I don't understand that "aggregate limit of $250 million," though.

If Vanguard Brokerage Services loses $1 trillion of customer securities above the SIPC limit, then Lloyd's of London will only pay $250 million.

I don't either. That would seem to be far too low of an aggregate limit for Vanguard which has how many trillions in accounts? But maybe there's something we're not understanding.

That is exactly what it means. No insurance company can possibly provide $1 trillion in coverage. Nothing short of a government bailout can insure against that kind of risk.

Fidelity's excess policy has a $1 billion aggregate limit:

In addition to SIPC protection, Fidelity provides its brokerage customers with additional "excess of SIPC" coverage. The excess coverage would only be used when SIPC coverage is exhausted. Like SIPC, excess protection does not cover investment losses in customer accounts due to market fluctuation. It also does not cover other claims for losses incurred while broker-dealers remain in business. For example, fraud claims would not be covered if the brokerage firm was still in operation. Total aggregate excess of SIPC coverage available through Fidelity's excess of SIPC policy is $1 billion.

https://www.fidelity.com/why-fidelity/s ... r-accounts

Hmmm. What's the hypothetical scenario in which $250 million aggregate coverage would be worthwhile? Rogue employee raids a small number of accounts?

[tibbitts]

In my MF account I can instruct Vanguard to withdraw money from my bank account and buy shares of VTSAX fund.
In the brokerage account, my wife has to instruct Vanguard to withdraw money from her bank account to be deposited in the settlement MM fund AND to exchange shares of the settlement MM fund with shares of VTSAX.

In my brokerage account, I buy shares of VTSAX in the same way you do in your MF account.

Same for my brokerage account. I can directly buy vanguard mutual funds using external bank accounts.

How do you do that ?
When she wants to buy the only choice in the pulldown menu is the mm fund.
To be accurate, this refers to a backdoor roth, so the operation is exchanging shares from a traditional ira (mm fund) into her roth ira (vtsax). Can’t do directly into vtsax; the choice is not available.

It has been a while since I saw that page, but I think one requirement is that you have a linked external bank account.
Then you say you want to buy so many shares or dollars worth of, say, VTSAX. Then when it says: Where is the money coming from? the external bank account should be one of the options.

I asked at Fidelity and they told me I couldn't do that in their brokerage account - everything from/to an external bank account had to go through the settlement fund. But I didn't try that much since I don't really care.

I do want to be able to redirect distributions from one fund to another directly, though.

[Wiggums]

In my brokerage account, I buy shares of VTSAX in the same way you do in your MF account.

Same for my brokerage account. I can directly buy vanguard mutual funds using external bank accounts.

How do you do that ?
When she wants to buy the only choice in the pulldown menu is the mm fund.
To be accurate, this refers to a backdoor roth, so the operation is exchanging shares from a traditional ira (mm fund) into her roth ira (vtsax). Can’t do directly into vtsax; the choice is not available.

It has been a while since I saw that page, but I think one requirement is that you have a linked external bank account.
Then you say you want to buy so many shares or dollars worth of, say, VTSAX. Then when it says: Where is the money coming from? the external bank account should be one of the options.

I asked at Fidelity and they told me I couldn't do that in their brokerage account - everything from/to an external bank account had to go through the settlement fund. But I didn't try that much since I don't really care.

I do want to be able to redirect distributions from one fund to another directly, though.

That has been my experience as well. I scheduled my bank transfer and then another task for the fund purchase. The good news is that it has been running Without fail for 15 years. The bad news is it takes two steps but it can be automated.

[Wiggums]

In my brokerage account, I buy shares of VTSAX in the same way you do in your MF account.

Same for my brokerage account. I can directly buy vanguard mutual funds using external bank accounts.

How do you do that ?
When she wants to buy the only choice in the pulldown menu is the mm fund.
To be accurate, this refers to a backdoor roth, so the operation is exchanging shares from a traditional ira (mm fund) into her roth ira (vtsax). Can’t do directly into vtsax; the choice is not available.

It has been a while since I saw that page, but I think one requirement is that you have a linked external bank account.
Then you say you want to buy so many shares or dollars worth of, say, VTSAX. Then when it says: Where is the money coming from? the external bank account should be one of the options.

I asked at Fidelity and they told me I couldn't do that in their brokerage account - everything from/to an external bank account had to go through the settlement fund. But I didn't try that much since I don't really care.

I do want to be able to redirect distributions from one fund to another directly, though.

That has been my experience as well. I scheduled my bank transfer and then another task for the fund purchase. The good news is that it has been running Without fail for 15 years. The bad news is it takes two steps but it can be automated.

[Thesaints]

It has been a while since I saw that page, but I think one requirement is that you have a linked external bank account.
Then you say you want to buy so many shares or dollars worth of, say, VTSAX. Then when it says: Where is the money coming from? the external bank account should be one of the options.

Yes, she has the linked account. The problem is that after selecting "where is the money coming from ?" the only option is the settlement money market, even if her brokerage account already contains other funds (or she may want to buy a new one).

[Longdog]

When they started, AFAIK, the only type of account was a MF account. Later, they added brokerage accounts. Now they want to decrease the overhead of managing two types of accounts.

Switching from MF account-type to brokerage account-type does NOT mean you have to sell Funds and buy ETFs. Just keep holding the same Funds if you wish.

I'm not sure there is even a single downside to switching to a brokerage account (maybe there is and I just don't know about it)

There is. The brokerage platform doesn’t support all of the features of the mutual fund platform. If you don’t use or know about them, then no downside.

[rkhusky]

To be accurate, this refers to a backdoor roth, so the operation is exchanging shares from a traditional ira (mm fund) into her roth ira (vtsax). Can’t do directly into vtsax; the choice is not available.

If you are moving from fund to fund, you want to choose Exchange. When I moved money from a tIRA to a Roth, I got some extra screens about the taxes that I would owe, but I was able to move directly from fund to fund, without using a settlement account. In fact, I have never used the brokerage settlement account. I use the Prime Money Market in my taxable account to transfer money between bank and taxable and tiRA and Roth IRA.