Vanguard Has Drastically Cut Commissions at its Brokerage

Vanguard is one of the preeminent mutual fund investment companies, managing over $1 trillion in fund assets. Vanguard offered the first low-cost index fund, the Vanguard S&P 500 Index fund, back in 1976 and has been credited with essentially pressuring competitors to reduce fees on their mutual funds over the years. Vanguard expanded into the field of ETFs back in 2001 and has become a major force in the ETF industry.

Although primarily known for its mutual funds and ETFs, Vanguard also offers brokerage services. I have never used Vanguard's brokerage in the past because there have always been less expensive alternatives, such as Ameritrade and Fidelity. However, on May 4, 2010 Vanguard officially became a player among discount brokers when it began offering commission-free trades on its ETFs and substantially reduced commissions on trades of non-Vanguard ETFs and equities.

There are four tiers within the Vanguard commission schedule as shown below (click on the image for a larger view). An investor may fall within one of the tiers based on the dollar amount of assets that the individual holds within Vanguard mutual funds and Vanguard ETFs. The lowest tier is for investors with less than $50,000 in Vanguard funds. At the lowest tier, investors pay a $20 annual maintenance fee and $7 for the first 25 trades of non-Vanguard ETFs and $20 for each trade thereafter.

The second tier (entitled "Voyager") is for investors who have between $50,000 and $500,000 in Vanguard mutual funds and ETFs. At the Voyager level, investors pay $7 per trade of non-Vanguard ETFs and equities.

The third tier (entitled "Voyager Select") is for investors who have between $500,000 and $1,000,000 in Vanguard mutual funds and ETFs. At the Voyager Select level, investors pay a mere $2 per trade of non-Vanguard ETFs and equities.

The fourth or highest tier (entitled "Flagship Services") is for investors who have over $1,000,000 invested in Vanguard mutual funds and ETFs. At the Flagship Services level, investors pay nothing for the first 25 trades of non-Vanguard ETFs and equities and $2 for each trade thereafter.

I am very pleased to see that Vanguard has cut its commissions and now offers commission-free trades of its ETFs. I am certain that Vanguard's move will put pressure on other discount brokerages to further cut their rates as well. The annual maintenance fee of $20 for investors with less than $50,000 invested in Vanguard mutual funds and ETFs may dissuade some investors from opening a Vanguard brokerage account. However, many investors who already have $50,000 or more invested (especially those with $500,000 or more) in Vanguard funds may choose to open brokerage accounts with Vanguard.