Fidelity, now the better choice over Vanguard

I’d like to state that I worship Vanguard’s founder Jack Bogle and his philosophy and everything he has done and continues to do for the small investor. I’d like to think the financial services industry would have reached this point of low-cost index funds without him, but it might not have and at the very least it would have taken much longer. I honestly believe no one outside my family has done more to make my retirement possible. I’ve been a devotee of Vanguard and continue to have accounts with them, but it’s a competitive world and Fidelity has finally given in to the low-cost index fund philosophy removing the final obstacle to them surpassing Vanguard.

A critical decision on where to place your investments and do your banking is something everyone will ultimately need to make. Sometimes this decision is made for you by your employer with your 401k location. When you are young, normally your first employer will use a firm like Fidelity Investments or one of the many other firms that provide 401k plans, so you really have no choice in 401k provider as long as you are employed by that company. Once you leave, though, you have three choices: leave your money in your prior employer’s 401k plan, roll the money to your new employer’s plan if they have one or roll it over to an IRA at an IRA provider of your choice. Normally it is much better to roll the money to a IRA since you have far more control, more choices and it is normally cheaper. In the past, Vanguard would have been the preferred choice for that Rollover IRA, but over the last few years Fidelity has dramatically improved its investment choices offering far more low-cost index funds that are very often cheaper than Vanguard.

My history

I have held both Traditional and Roth IRA and 401k money in many of the major providers at some point in my career, including Fidelity, Vanguard, Charles Schwab, TD Ameritrade, Merrill Lynch and ETrade. So I have extensive experience in the pros and cons with most of the providers. Currently, I use a combination of both Vanguard and Fidelity for my 401k, IRA, non-retirement assets and banking. My employer uses the Fidelity 401k and I’ve had prior employers use Fidelity, Schwab, Merrill Lynch and many smaller providers.

I have worked for 12 employers, with almost all offering a 401k plan and a few offering 401k matching.

I opened a Fidelity account in the 1990s and a Vanguard account in 2001 when it became clear that Vanguard followed the low-cost, index strategy that I desired.

Cost Comparisons

Until the last few years, Fidelity only offered a few index funds and did not attempt to compete with Vanguard on expenses. That has changed dramatically over the last few years. The philosophy that makes the most sense is to minimize the expense ratios for the index mutual funds or ETFs that are being purchased. Commission fees are somewhat important but if you are sticking to a buy and hold strategy, commissions aren’t that important since they are only charged at the time of purchase or sale. The expense ratios are going to be far more important to minimize. Fidelity offers an excellent page describing their expense ratio advantages.

Investment Options

Fidelity now offers more than enough index funds or ETFs to allow you to build a diversified portfolio. Vanguard certainly offers far more index fund options at a low cost, but the average investor does not need that universe of options. A portfolio of 3 to 6 funds across diverse asset classes keeps things simple and cheap.

Service Comparison

This is where Fidelity consistently outperforms Vanguard. Some of these are subjective and are certainly only my experience only.

  1. Fidelity has a number of brick and mortar offices for those that require an in-person experience. I have personally never used one, but have many family members that love that option. Vanguard only offers a website or phone interactions. This reason alone can be one for moving money to Fidelity since non-tech savvy or older investors need more of this attention. It’s the reason I have moved both of my parents to Fidelity.

Banking Comparison

For me, this is the biggest differentiator between Fidelity and Vanguard. I’ve used Fidelity banking capabilities since 1996. There are many features offered that Vanguard does not offer:

  1. Fidelity allows you to link your investment accounts to your bank allowing easy transfers to and from Fidelity.
  2. Fidelity offers a no-fee ATM card that can be used at almost any ATM worldwide. This has been a wonderful benefit when traveling, especially internationally. There are no concerns about the ATM fees, even at the overpriced airport or hotel ATMs. I’ve always been reimbursed quickly and am still amazed more people don’t know about this feature or take advantage of this service.
  3. Fidelity has a 2% cash-back Visa credit card that offers the best cash rewards rate in the industry.

Because of these features, I only have a brick and mortar bank as an emergency backup for a cashier’s check situation, which is very rare. I’ve done all my banking using Fidelity for over 20 years now.

Technology Comparison

  1. Fidelity has a superior website with many more options for research and far better usability in their interface. Vanguard claims that this is to save the investor money, but this falls flat if they are not going to beat Fidelity on costs like expense ratios.
  2. Fidelity offers more sophisticated retirement calculators that are either quite simple or quite sophisticated. Vanguard partners with Financial Engines for their more sophisticated calculator. This tool is reasonably good and I have used it extensively, but it is now suffering from a lack of attention and gives what I consider inaccurate results. Financial Engines also has trouble getting data from providers (see the next bullet).
  3. Vanguard’s ability to investment positions and transaction data to Retirement Calculators, Quicken, Mint or other services is far more inconsistent than Fidelity. I have often had issues with downloading transactions from Vanguard where I almost never have any issues with Fidelity. Vanguard has also had an ongoing dispute with Intuit and Quicken refusing to allow download of 529 transactions into Quicken. I’m unique in that I need that capability, but it was just one more example of Vanguard connectivity pain.

Other competitors

I no longer consider any competitors that viable in this space for my philosophy on investing. The closest is Charles Schwab. I have used them in the past and found no advantage to them over Fidelity, but they are obviously not standing still. I’ve reached a point where I can’t say there is anything Fidelity needs to add to make me more satisfied. It appears Fidelity will continue to pull further ahead

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