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Since its founding in 1974, the Vanguard mutual fund organization has driven the financial services industry nuts. Run as a giant cooperative, effectively owned by its investors, the firm has illustrated how little you actually have to charge in fees to operate a mutual fund.

In what Forbes once described as “the world’s most profitable industry,” the financial services industry sells a product for which no one ever receives a bill or has to write a check. Costs are just automatically deducted from account balances on a daily basis.

A recent Wall Street Journal article posted on Yahoo Finance titled “Wall Street to Vanguard: We’re Not Your Doormat” disclosed that several major brokerage firms are now making it more expensive for customers to purchase Vanguard funds as part of their investment mix. If the funds are made available, it will be in exchange for higher fees than the standard transaction fees for other securities or funds.

The traditional retail brokerage business introduced so-called “mutual fund marketplaces” in the early 1980s. Firms had always sold “load” mutual funds that charged steep up-front or back-end commissions, but in the face of competition, the fund industry introduced “no-load” funds, which customers could purchase within their regular brokerage accounts. In lieu of traditional commissions, the firm received payment through “marketing fees” known as 12(b)-1 fees paid every year as a percentage of the ongoing higher annual fund expense ratio. Over time, this costs more money than a one-time up-front commission.

But some fund companies like Vanguard refused to pay 12(b)-1 fees, much less charge them to customers. Their marketing was based on an “order-taking” model. They spent nothing on sales or advertising, charged less than a fifth than the rest of the industry, and watched as their funds kept showing up toward the top of most performance rankings, helped in part by the favorable fee structure.

Responding to demand, the brokerage industry with their mutual fund marketplaces adopted a “One step backward, two steps forward” approach. They felt obligated to offer true no-load funds. But they were compelled to charge a transaction fee for funds that paid them no 12(b)-1 commissions. People typically eschewed funds that required transaction fees and turned to the “free” no-transaction list.

Now, according to the Wall Street Journal article, several brokerage firms have had it with Vanguard. They are raising their transaction fees specifically for Vanguard funds or not allowing some of the funds altogether in some cases. There could be many underlying motives, starting with a desire to herd investors into Exchange-traded funds, which resemble index funds but are actually securities trading throughout the day. Such funds generate trading commissions like any other stock — plus there’s “order flow.”

Order flow is the arcane practice described in Michael Lewis’ book “Flash Boys,” which illustrates how high frequency traders using computerized trading models pay the brokerage industry to be allowed to trade microseconds ahead of everyone else. The book describes companies like Charles Schwab, which received as much as $250 million per year in “payments for order flow.” The cost to investors for inefficient trading is estimated at less than one tenth of a percent.

That doesn’t sound like much until we realize that on a daily average market volume of $225 billion that costs the investing public about $160 million every day. Presumably, Vanguard manages to avoid these charges given the leverage that comes from being a $5 trillion behemoth famous for pioneering the use of index funds — funds that experience relatively little turnover or trading anyway.

For many creatures of habit, it’s convenient to keep money housed at a major institution where it may always have been. However, if a mutual fund is attractive for any reason but is not on the list of “no-transaction fee” funds, it probably makes sense to pay whatever it may cost to move the money to the fund you’ve chosen.

Your firm will still be the custodian and the fund will still show up on your statement. For long term investors, the annual expense ratio savings over time, coupled with the resulting improved returns, will be a payoff for having overcome inertia or the “status quo bias.”

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