Vanguard warning

[FinallyRetired]

Thought I'd pass on a stupid mistake I made and won't make again. This particular mistake cost me a couple of thousand, though it could have been much worse.

Vanguard, along with other fund companies, discourage frequent trading because it drives up their cost. I don't consider myself a trader, more of a hedger, increasing bonds and decreasing equities every couple of years when the market gets very weak. I realize this is a form of the much criticised market timing, but it saved me big bucks in the market crash.

I can understand Vanguard's policy and choose to live within it. Until recently, their policy was that if you moved out of a fund -- even into cash -- you could not buy back into it for a certain time period, I think it was 6 months.

Recently, Vanguard and other fund companies changed the rules. For Vanguard, the instituted a large penalty for moving out of certain funds before a certain time -- as much as 2% if you move out within 2 months. Although this appears on the fund prospectus and in their online fund description, be aware that there is no warning on their online fund transfer page. That is, once you own the fund, if you go back in within two months and sell it, the online system will let you do it the same way as you do it for a fund without the penalty, and you won't know about it until you get your statement.

So, those of you that transact Vanguard funds online, be careful that you don't take the big hit I did. That's why they say always read the prospectus but, well, this time I didn't.

 

[Texas Proud]

There was a recent thread on this..... and most people think that there IS a screen that tells you about the penalty but that you probably clicked it without reading...

I have not tried it, so I can not say for sure who is correct.... however, I have seen a screen that will show you the potential penalty you will pay for all your funds... just click there before you sell and make sure you are not getting caught..

BTW, which fund... I might have to 'thank you' for a bump in my return

 

[FinallyRetired]

Too bad I missed the original thread. Yes, there is a master page with penalties for each fund. Obviously I missed that, but there is no warning at the page where you actually make the fund transfer. Seems it woud be easy to have a warning just before you click to make the transfer asking if you are sure you want to pay the penalty. But I suppose this way they goose their fees from people like me.

Anyway, glad to help but I'm afraid it's the fund mgr that needs to thank me for his extra bonus. I don't think they can account for extra fees as fund gains.

Oh, it was their total international index fund. I'll probably be transfering over to ETFs, once I understand their risks better. If I'm in an index anyway, I don't see the value of penalties for moving money around if I can keep the overall fees, returns, and risks equal.

 

[Olav23]

This is the original thread. I know it, because I wrote it. Unfortunately this same thing happened to me. I was, as you are feeling now, completely livid.

http://early-retirement.org/forums/index.php?topic=12891.0

I honestly think there is some problem with their site and sometimes it warns, sometimes it doesn't. But, just so you know, Vanguard will give you no pity or even research the issue. (unless you are in a different class of accounts than me)

It is an expensive lesson that you hopefully won't have to deal with again, as you know to look at the fee screen ALWAYS before making a transaction in the future....

 

[FinallyRetired]

Thanks for the link to the original thread. You know what, I wasn't livid before reading your thread, just counted my loss against my own stupidity. But after reading your thread, something's not right here.

For one thing, you had a screen that said "Thank you. Since you purchased within the last 60 days, you have now been assessed a 2% fee. The total will be $450"....
I never got a screen like that, just a screen saying the transaction had been accepted, with a reference number. I didn't know I'd been charged the 2% until I received my statement!

<Now, had this been on the screen PRIOR to the confirmation, like the "submitting will make the exchange" page, I OBVIOUSLY would have held it for another week or two just to make this requirement. But I feel bamboozled, as if they PURPOSELY do this to collect a hefty fee.>

Given your complaint directly to Vanguard, and I'm sure there were other complaints, and given they not only didn't put the warning at the time of the transfer, but took off what you say was there.... the only conclusion I can reach is they are doing this on purpose to goose their fees.

I never tried to call Vanguard, knowing there is nothing they would (or even should) do in my case. After reading your thread, maybe I should call and ask why they at least had a post-transfer notice and now they have nothing at all. I guess they get fewer complaints this way.

Oh well, water under the bridge. As I said, I'm moving to ETFs anyway. I can understand keeping fees down for a managed fund, or a fund investing in smaller companies, but kripes, this was their total international index fund. If an ETF (even their own) doesn't have these penalties, why should they charge it for an index?

 

[al_bundy]

i'm going to have to doublecheck this on my wife's 403b. they now have 2 vanguard funds and on the website it doesn't say anything about trading restrictions.

i just bought the funds and don't plan on keeping them for very long because i don't have much faith in this latest rally

 

[Texas Proud]

Anyway, glad to help but I'm afraid it's the fund mgr that needs to thank me for his extra bonus. I don't think they can account for extra fees as fund gains.

Oh, it was their total international index fund.

NOPE... read the prospectus... the money goes into the fund... the management does not get a penny of this money...

In truth, it is to help offset trading costs for people who buy and sell quickly... but if the trading costs are less than 2% it boosts the return of the fund...

Since I have this fund..... I guess I get a fraction of a cent (small fraction!!)...

 

[NinjaPigeon]

NOPE... read the prospectus... the money goes into the fund... the management does not get a penny of this money...

In truth, it is to help offset trading costs for people who buy and sell quickly... but if the trading costs are less than 2% it boosts the return of the fund...

Since I have this fund..... I guess I get a fraction of a cent (small fraction!!)...

Woo! I own it too. Thanks you guys for your contributions to my retirement Although I do agree that there is no reason not to have a warning screen. Vanguard can very easily check if a purchase would result in a fee before you submit it.

 

[FinallyRetired]

Texas Proud, enjoy your small fraction of my penny and spend it wisely

I checked the prospectus and you're right, the early redemption fee doesn't go to the management, at least directly, instead it goes into the fund assets. But the fee is not credited to total return, it just becomes money to be invested back into the fund to either make or lose money. The fund mgt is paid partly on the basis of assets under management, as well as fund performance. From the prospectus:

"For each advisor, the quarterly fee is based on certain annual percentage rates applied to the average net assets managed by the advisor for each quarter. In addition, the quarterly fees paid to each advisor are increased or decreased based on the advisor’s performance compared with that of a benchmark index."

So, the advisor does get a fraction of a fraction of a penny from my early redemption fee because it added to assets under management that would not have otherwise been there.

Which is fine, I really don't care how they do it, and their philosophy makes sense to me. My only point is that, since they allow easy transfer online, it wouldn't hurt to put a warning flag at the time of the transfer. That would prevent a lot of uninformed transfers, such as mine, and might keep better customer relations.

 

[Lsbcal]

I'm pretty careful about not being caught in this sort of thing. But if it happened to me with no prior warnings on my screen then I would escalate the complaint up the chain and hope for a one time reprieve. What can you loose (just a few thousand dollars ) ? If you have a good history with Vanguard transfers then that will count in your favor. I'd consider starting with a verbal discussion with a rep and get a name to write to and then follow up with a written protest letter. I would assume you will loose on the first verbal try but the discussion with the rep may help you to assess and counter their arguments.

Les

 

[youbet]

Although this appears on the fund prospectus and in their online fund description,

The lesson for me in this thread, and in the previous thread on a similar situation, is that you must be aware of the fees, loads, and other charges funds will charge you. This doesn't need to be a heavy duty, time consuming study of the prospectus, but rather a quick and simple glance of the summary page.

be aware that there is no warning on their online fund transfer page.

This seems to be up for debate. In the previous thread, a number of Vanguard customers checked and said they did get warnings........ Could Vanguard have an issue with their web site where sometimes you get a warning and sometimes you don't?

 

[al_bundy]

https://flagship.vanguard.com/VGApp/hnw/FundsByName

here is the list of funds and the ones with redemption fees say so under the name of the fund

 

[justin]

In the previous thread, a number of Vanguard customers checked and said they did get warnings........ Could Vanguard have an issue with their web site where sometimes you get a warning and sometimes you don't?

It's either operator error or machine malfunction. VG's website typically gives warnings of the fee amount BEFORE the trade. Here's a copy of what my screen said:

http://early-retirement.org/forums/index.php?topic=12891.msg237475#msg237475

 

[ESRBob]

Seems to me I've had times when I literally couldn't make a purchase back into a fund, too, because I had sold out of it prior, and I also get messages telling me I can only make 1 or 2 trades a year in or out of the fund. I try to just do an annual+ rebalancing, so it isn't usually a factor, but sometimes I need to raise some funds to cover a check written but there I' think I'm always selling bonds. Looks like most of the ones with these back-end fees are stock funds (and HY Corporate).

Wonder if you have a long-term position in the fund, but have added funds within the last few months, and then sell, whether they count that as a fee-able transaction, or do they look at First-In, First-Out.

 

[Texas Proud]

So, the advisor does get a fraction of a fraction of a penny from my early redemption fee because it added to assets under management that would not have otherwise been there.

Which is fine, I really don't care how they do it, and their philosophy makes sense to me. My only point is that, since they allow easy transfer online, it wouldn't hurt to put a warning flag at the time of the transfer. That would prevent a lot of uninformed transfers, such as mine, and might keep better customer relations.

You are right there.... they do get their fraction... but they get a fraction of the whole amount that is HIGHER than my fraction... DANG...

I AGREE there should be a screen if there is not. I can only take the word of you and others. Some have said there is a screen, others have said there is not. And I think that someone who is not a voyager level did test it and saw a screen...

Sorry you got hosed. I would be mad myself.

 

[justin]

Wonder if you have a long-term position in the fund, but have added funds within the last few months, and then sell, whether they count that as a fee-able transaction, or do they look at First-In, First-Out.

It's FIFO, based on my playing around with their system and pretending to sell different amounts. You may still be excluded from buying more of the fund if you buy/sell within a certain period of time (haven't experimented with that really).

 

[LOL!]

In the previous thread, a number of Vanguard customers checked and said they did get warnings........ Could Vanguard have an issue with their web site where sometimes you get a warning and sometimes you don't?

What if the warning came as a pop-up dialog and you have pop-ups blocked? In IE, there is only the small text below the menu bar/tab bar to look at, but maybe another blocker does something different?

 

[FinallyRetired]

I appreciate all the replies and comments. For what it's worth, I'm 99.9% sure there was no warning page. Been dealing with Vanguard for 20 years and online every since they started that option. I've noticed their other warnings about not being able to get back into a fund that I'm selling for 60 days, and I sure as hell would have seen a warning that it's going to cost me 2% to sell one.

And I'm not going to pursue this with Vanguard, not worth the hassle and frustration for a very slim chance of success, since I have no proof. Just wanted to let others know, and wish I had read the previous thread.
-----------------------

OK, you guys inspired me. You've made me realize that at my stage of retirement I've earned a right to bitch complain and have the time to do it. So I just wrote the following email to Vanguard, I will let you know how they respond. I blanked numbers for privacy:

Dear Vanguard Member Services

I’ve been investing in Vanguard funds for nearly 20 years, and have used your online service for at least 10 of those years. I’ve been generally pleased with your products and your service, and applaud your efforts at keeping management fees low.

Recently, however, I had the unpleasant experience of paying a 2% redemption fee from selling one your international funds before the two-month holding period. I invested $X on Y, sold it on Z, and was charged $X. I have nothing against your redemption fee per se, and consider it a strong way of holding down trading costs. I also realize the fee is well noted on the fund prospectus and on several places on your site.

I take blame for not doing sufficient due diligence prior to buying and selling this particular fund. However, I also think it would have been very simple for you to provide a warning notice on the online transaction page about this excessive early redemption fee. Had I seen such a notice, I certainly would not have sold and lost $X when I could have just held the fund longer. Your transaction page provides warnings about not being able to cancel a transaction once placed. I’ve also read notices about not being able to re-enter some of your funds within 60 days after selling. Yet there was no warning provided about this early redemption fee at the time of the transaction, and I didn’t realize the steep penalty I had paid until reviewing my statement.

I’ve communicated with other Vanguard investors about this issue, and some say they’ve seen a warning screen, and others have not. I have no proof but, after 10+ years of online transactions with you, and having noticed other warnings, I’m pretty darned sure I would have seen a 2% redemption fee notice.

Please let me know if you are able to make any kind of adjustment to my account as I decide on my future investments.
---------------------
The ironic thing is, before I was able to send this email, the Vanguard site gave me a warning page about how long they would take to reply, etc.

 

[chinaco]

This particular mistake cost me a couple of thousand, though it could have been much worse.

Vanguard, along with other fund companies, discourage frequent trading because it drives up their cost. I don't consider myself a trader, more of a hedger, increasing bonds and decreasing equities every couple of years when the market gets very weak. I realize this is a form of the much criticised market timing, but it saved me big bucks in the market crash.

I can understand Vanguard's policy and choose to live within it.

I choose to live with it as well. As a matter of fact, I think it is a good idea and it does not impact me because I do not move money out of funds often.

VG open-end funds are for long-term investors (little movement). If you want the short-term... go for the ETFs. That is one of the benefits of ETFs... trade all you want. Of course... you have a brokerage fee for the trade.

One of the reasons they impose the charge is because of the costs the short-term flipper imposes on all of the other members of the fund (tax implications, price fluctuations, mgmt cost, etc.) The 2% penalty seems to be a more recent addition. Apparently because of the low fees, some people still would choose to game the VG open-ended funds and still make out (compared to competitor companies). The ability to open accounts (in other companies) easily via electronic accounts (brokers) has probably caused an increase in the activity.

 

[al_bundy]

most 401k's don't offer ETF's and if you have a plan with funds that don't charge sales charges then it's great if you want to play the annual price swings

 

[Alex]

I called and spoke with a customer service rep at Vanguard about this issue. I was assured that Vanguard always has a warning posted. Everytime. Period. You probably just missed it and clicked through the screen. If you really think you didn't get a warning, then call and complain. You've nothing to lose but a few minutes of time.

 

[TromboneAl]

Well written email to Vanguard. Thanks for the warning about this; I will be super careful from now on.

 

[Olav23]

I choose to live with it as well. As a matter of fact, I think it is a good idea and it does not impact me because I do not move money out of funds often.

I don't think any of us disagree with the reasoning for these fees. The thing that causes issue is the lack of a warning. We all agree that they should mop the floor of the supermarket. But at the same time we'd prefer the "wet floor" sign be before you bust your ass, not placing the sign after the puddle

I think it is just something wonky with their site that they don't want to admit to.

 

[chinaco]

I don't think any of us disagree with the reasoning for these fees. The thing that causes issue is the lack of a warning. We all agree that they should mop the floor of the supermarket. But at the same time we'd prefer the "wet floor" sign be before you bust your ass, not placing the sign after the puddle

I think it is just something wonky with their site that they don't want to admit to.

Apparently there is a note... but how many people actually read all of the information on the pages?

Self inflicted wound!

I will admit... I am disappointed when I make a mistake. Since I am usually fairly careful, I cam quick to assume that someone else or something else is to blame. Often it is my oversight.

 

[riskadverse]

This is just another way the mutual fund companies make money. The industry is fraught with legal ways to skim profits from investors. Write emails and call customer service all you want, but if you ever see a dime, I would be very surprised.

They also have a (legal) policy of "fair market pricing", which allows them to set the NAV to whatever they want - different from the actual NAV on any (or all) days. Imagine which way they would lean if they have an accumulation of 10 times normal redemptions at market close. I would think they might undervalue the NAV given that infomation before they set the NAV for that day. Guess what, the reverse is perfectly legal too. Ten times normal purchases today, well the NAV will be pretty high I bet. Not too many things are bought or sold where the price is set after the commitment to buy or sell is made.