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Outside the Box: Fidelity vs. Vanguard — which is better for you?

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Lots of investors ask me whether they should invest at Fidelity or at Vanguard. Which is better?

The really short answer is that they are both good companies, with differences that might or might not matter, depending on what you are looking for.

For years, I’ve been helping investors make the most of Fidelity’s offerings​, and I’ve done the same with Vanguard. (For the record, I have no financial relationship with either company.)

At either Fidelity or Vanguard, you can find good products at good prices. At the same time, you can go wrong at either company if you pick funds and/or strategies that aren’t suitable for you.

Think of it this way: Pick just about any two major automobile manufacturers. With either one, you can find models likely to meet your needs—and other models that will fall short. The choice between Fidelity and Vanguard is a bit like that.

If you are wedded to either Vanguard or Fidelity through a 401(k) or other retirement plan, or because you already have accounts there, I doubt you need to make a switch. But again, this depends on your needs.

With that out of the way, let’s look at each company in general terms, then get more specific about what might work for you personally.

F​idelity

Fidelity has its roots in the Fidelity Fund, established in 1930. The fund, which still exists, became part of a management company in 1946.

Fidelity is owned by its employees and a series of family trusts, and like most businesses, the company needs to operate at a profit. (Vanguard’s business model is different, as we will see.)

This means Fidelity’s financial incentive is to charge its customers whatever the market will bear. As I’m sure you know, higher fees and expenses—when other things are equal—result in lower returns to investors. Before you dismiss Fidelity, you should note that it offers a handful of useful index funds with expense ratios of zero.

In addition, some (but not all) Fidelity index funds require only $1 to open an account, ​and that’s ​very helpful for investors who are just getting started.

In broad terms, Fidelity tries to offer a wide array of products for investors who want to trade or customize their allocations exactly.

V​anguard

Vanguard was started in 1975 by John Bogle, who pioneered the index fund aimed at individual investors. The company operates more like a cooperative: It is owned by the shareholders of its mutual funds.

With no outside investors, Vanguard has no incentive to charge any more than it needs to keep the company healthy; that in turn leads to generally lower fees and expenses, which in turn generally leads to higher returns.

Vanguard offers actively managed funds in addition to index funds, which tend to be conservatively managed, with lower-risk strategies. ​ ​Many of Vanguard’s mutual funds require an initial investment of $3,000 to open an account, making them less attractive for investors just getting started. And while the company does not have index funds with zero expenses, most of its expense ratios are very low.

​5 investment needs

To understand how all this might apply to you, see if you fit into any of the following groups.

​You want a low-cost index fund solution.

If you’re moving money from a retirement account and want inexpensive index funds you can live with, you’ll find plenty of them at either company. ​ ​Vanguard used to have lower fees, but both companies have been reducing fees. Recently, Fidelity has emerged as the low-cost provider.

​​You want a supermarket-like set of investment opportunities.

At Fidelity, you can mix sector funds and all sorts of actively managed funds along with some core index funds. Sure, your expenses likely may be a bit higher, but Fidelity gives you lots of the choices you crave. 

I don’t advocate active management or other attempts to beat the market. The evidence is compelling that those attempts fail much more often than they succeed. ​ ​For investors who favor active management, Fidelity’s large pool of talented, hardworking investment analysts and fund managers might tip the scales.

However, Vanguard also has a lot of well-run actively managed funds, and they cost less. 

​​You’re a first-time investor with not much money, or you’re opening a custodial account for a young person who’s just getting started.

With its very low minimums, Fidelity is the clear winner.

​​You’re looking for a simple lifetime decision using only a few balanced funds that include both equities and bonds.

Both Fidelity and Vanguard offer good choices, but I give the nod on this one to Vanguard, where you can easily find just the right combination to meet your needs.

Here’s an article from last year and a video describing my favorite Vanguard funds for retirees.

​​You know what you want to invest in, and you want to use exchange-traded funds (ETFs) instead of mutual funds. Each company offers lots of commission-free ETFs.

But Fidelity gets the nod here, for the following reason: ETFs trade like stocks, and most platforms require you to buy and sell full shares. So if you want to buy or sell $150 in an ETF with a price of $92.25, you can trade one share (and have too little) or two shares (and have too much).

If you’re investing (or withdrawing or rebalancing) $15,000 in an ETF, you can come very close to your target. But if you need to trade $150, you’ll want to head to Fidelity, where you can specify (in dollars) exactly how much you wish to buy or sell, and probably wind up with partial shares, for example a balance of 101.4651 shares.

Your individual needs are the most important factor in choosing between Fidelity and Vanguard.

If you understand what you’re looking for — and what you’re willing to pay — you can do well at either company.

Learn how to shake up your financial routine at the Best New Ideas in Money Festival on Sept. 21 and Sept. 22 in New York. Join Carrie Schwab, president of the Charles Schwab Foundation.

Richard Buck contributed to this article.Paul Merriman and Richard Buck are the authors of “We’re Talking Millions! 12 Simple Ways to Supercharge Your Retirement”. Get your free copy.

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