Vanguard gains on rivals by reducing customer fees

BOSTON - Think of Vanguard as the Wal-Mart of investing. It manages more money than any other mutual fund company, so it has tremendous pricing power. When it makes a move, competitors feel pressure to follow suit.

Vanguard said last week that it would reduce fees for about 2 million of its individual customers, the latest in a series of cost-cutting moves that have turned up the heat on rivals like Fidelity Investments and Capital Group's American Funds.

The change applies mostly to individual investors, not to institutional shares that are held by companies through their 401(k) retirement plans. Institutional shares already charge the lowest fees of any class.

"There is a race to the bottom on expenses, and Vanguard is winning huge," says John Osbon, who manages about $40 million, much of it in Vanguard funds, at Boston-based Osbon Capital Management. "It's a low-margin, high-volume business, and Vanguard's volume is going up, and for the others it's going down," he said.

Vanguard said it would lower how much money customers need to invest to qualify for its Admiral shares, which have the lowest fees. For index funds, which track market averages like the Standard & Poor's 500, the minimum will drop to $10,000 from $100,000.

For its actively managed funds, which are less popular, the new investment minimum will be $50,000, also down from $100,000. In all, Vanguard said it would bring in about $100 million less a year.

This year, $36 billion more has been deposited into Vanguard stock and bond funds than has been taken out, according to Morningstar. More has been taken out than put in at Fidelity and American, which place more emphasis on actively managed funds.

Fidelity in particular closely watches Vanguard's cost-cutting moves and is likely to cut fees itself to respond, said Doug Dannemiller, an analyst with the research firm Aite Group. Fidelity spokesman Vin Loporchio declined to discuss its next move, but said the company is always evaluating products and services.