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Transition your Vanguard account to a Brokerage Account

Vanguard has been after me to make this transition for months. They list a number of good reasons why I should. It won't cost me anything. Does anyone know of negative consequences for doing so?


  • Using a Vanguard brokerage might present a minor problem when doing Roth conversions. My experience (with another broker/fund family) is that one cannot give a dollar amount to convert; only number of shares can be specified. In contrast, if an IRA is directly with the fund, then you can do a precise dollar conversion. Check whether Vanguard can do this from a brokerage account.

    If you were able to write checks directly from your fund (some bond funds may have had this feature), you'll lose that with the brokerage. (The brokerage can offer check writing, but not directly from the funds in the brokerage.)

    If you're converting a taxable account, you'll get multiple 1099s for the split year. (Okay, that's a really small downside. But consolidating 1099s is the only upside I see to the conversion.)
  • I've never done it because I have never found the answer to one question - does a Brokerage IRA carry the same state protection that a Traditional or Rollover IRA gets? (This would be state specific; I live in WA State.)

    You might take your question to:
    If you do a search there have been several discussions of this.
  • @Anna- re "the same state protection that a Traditional or Rollover IRA gets"-

    I have no idea what you are referring to here. Could you give an example of the "state protections" for WA?

    Thanks- OJ
  • edited October 2017
    Disadvantage of a VG Brokerage account:

    Can NOT use the 'directed dividends' (d/d) option, which is currently available only to "regular" (i.e., non-brokerage) accounts.

    If you plan it out, the d/d tremendously!!! simplifies handling of IRA RMD's.

    The supposed advantages of VG brokerage escape me, and their repeated promotion of the "brokerage option" - without mentioning the loss of d/d - troubles me.

    IMHO, only a fool would convert to brokerage.
  • ibartman said:

    Disadvantage of a VG Brokerage account:

    Can NOT use the 'directed dividends' (d/d) option, which is currently available only to "regular" (i.e., non-brokerage) accounts.

    I've read people posting that, and it was probably even true in the past, but it isn't a problem now. From "Moving your Vanguard funds to a Vanguard Brokerage Account", Effective November 2016, Disclosure statement:
    What about dividends and capital gains
    For all your brokerage holdings, you’ll have two options:
    • Reinvest them in additional shares of the distributing holding.
    • Distribute them in cash to your money market settlement fund.

    Once your Vanguard mutual funds are in your brokerage account, you’ll have two additional options for distributions paid on the funds:
    Have them sent by electronic transfer to your bank.
    • Have them sent by check to your address of record.
  • In a brokerage account, you can't automatically send distributions from one vanguard fund to another vanguard fund as you can with a non-brokerage vanguard account.
  • The brokerage account offers SIPC protection. The regular account does not. Although this is probably no issue given it's Vanguard I'd rather have the protection than not. This advantage outweighed any disadvantages in my case so I made the switch years ago when first presented with the option.
  • Spoke to VG rep. He indicated that basically if you plan to hold only VG mutual funds, it is not really worth your while. For that reason, I did not convert my accounts over.
  • edited October 2017
    Old_Joe said:

    @Anna- re "the same state protection that a Traditional or Rollover IRA gets"-

    I have no idea what you are referring to here. Could you give an example of the "state protections" for WA?

    Thanks- OJ

    Actually, an article about your state in the LATimes first drew my attention to the difference at the federal level in the treatment of 401K type retirement accounts and IRA type when it comes to bankruptcy/litigation.
    A chart showing the litigation part by state (2014 ):

    I realize that this sort of stuff isn't a big deal (probabilities) but I could not see any reason to trade off my Vanguard IRA accounts (some Rollovers which I vetted with the law here) for the Brokerage equivalent if it lost such protections. I just was simply saying that if I were sure of this one thing I wouldn't hesitate on Vanguard's preferred conversion of my accounts. So far the only consequence has been that Vanguard says without the conversion, RMD (MRD) distributions can only go to my bank and not directly to my Vanguard taxable brokerage account. I don't really understand why that is.
  • At first, the directed dividend "problem" looked like a show stopper because I currently use VMMXX as my settlement fund for distributions. Now I see that the Brokerage Account uses their MM settlement fund - same difference. Now my question is whether to include my substantial holdings with FIDO and TRP into a VG Brokerage Account. I currently manage them myself, and $2-7 per trade using the Brokerage Account is $2-7 more than I'm paying now. Exactly how do they define a "trade"?
  • Two points.
    Vanguard might actually pay you some incentive to move assets from other firms.
    Dividend reinvestment might not count as a "trade" at Vanguard; it doesn't at Fidelity.
  • Johann said:

    In a brokerage account, you can't automatically send distributions from one vanguard fund to another vanguard fund as you can with a non-brokerage vanguard account.

    ibartman wrote about using directed dividends in conjunction with IRAs. Since people typically use IRA distributions/dividends as a source of income (cash), that's the way I read the comment.

    Point noted, my error.

    Which raises the question - how does directing dividends from an IRA (which usually don't reach the level of RMDs) " tremendously!!! simplif[y] handling of IRA RMD's"?

    SIPC insurance is often mentioned as a benefit of placing the fund inside a brokerage. How is this supposed to help? SIPC is protection against the brokerage doing something bad, like running off with the fund shares. ISTM that if you don't add a broker as an additional handling layer, you don't need this extra SIPC layer of protection.

    "SIPC protects against the loss of cash and securities – such as stocks and bonds – held by a customer at a financially-troubled SIPC-member brokerage firm. ... SIPC protection is limited. SIPC only protects the custody function of the broker dealer, which means that SIPC works to restore to customers their securities and cash that are in their accounts when the brokerage firm liquidation begins."

    Regarding bankruptcy protection - that is inherent in the vehicle (IRA or 401k), not the custodian (fund family or brokerage). You'll get IRA protection whether the IRA consists of funds invested directly with the fund distributor or funds held at a brokerage.

    With respect to what protection you get on funds that came from a 401k - the LA times article is either old or wrong. If you can show that the account came from a 401k, then it gets the same bankruptcy protection as if it were still in the 401k. However, if you choose not to declare bankruptcy (or you can't show that the money came from a 401k) then your protection is limited to whatever your state provides.
  • Thanks @Anna & @msf for the clarifications and additional info.

    Anna- The RMD to a bank must be a VG quirk. American Funds simply transfers our RMDs to our non-IRA mmkt account, where we can do whatever we want in the way of reinvestment.
  • edited October 2017
    On Oct 27 msf asked:
      "How does directing dividends from an IRA tremendously simplify handling of IRA RMD's?"
    Here is one answer. Suppose that ...
      1. You own a number of Vanguard mutual funds, in a retirement account which is held in the form of a VG regular [non-brokerage] account.

      2. Many of the funds pay regular or semi-regular distributions.

      3. You take your RMD monthly.

      4. Interest rates are unattractively low.
    (Sound familiar?)

    Then you could - for example - direct all of your distributions (from all of your other funds) to a single -for want of a better term- 'distribution fund'. This might be the Vanguard Wellesley fund or the new Global Wellesley fund.

    The 'distribution fund' might have been pre-seeded or funded with some money in addition to the distributions that it (automatically) collects.

    You could then take all of your monthly RMD distributions from the single 'distribution fund' (e.g., the Wellesley Fund).

    When you check your RMD at the beginning of each year, you could look at the balance of the 'distribution fund', and fudging a little for expected distributions and appreciation or depreciation - make sure that you have enough in the 'distribution fund' to cover the upcoming year's RMD requirements.

    Can't do this with a brokerage account.

    While one may hold ETFs in addition to VG Mutual Funds prior to retirement and time to take RMD's, once one starts taking RMDs, can liquidate all ETFs in retirement accounts, transfer to more-or-less equivalent Vanguard funds (held in regular non-brokerage retirement accounts) and take advantage of the wonders of directed dividends.

    One can also - from time to time - "buy low" or reinforce an existing position, by directing all of the dividends from all of the other mutual funds to the fund that is "low" or which you want to gradually build a position.

  • As I understand it, you're prefunding the Wellesley account to ensure that it has enough to cover the year's RMDs (after also including the expected dividends from other funds in the IRA). You're having Vanguard automatically make your with RMD withdrawals monthly.

    That is certainly functional. But by having the fund distributions directed out of the funds and into the Wellesley account, you're throwing your asset allocation out of whack. The higher yielding funds are getting depleted more quickly, the others less quickly. Rebalancing appears to take on more importance with this strategy.

    In this sense, it seems you're trading ease in one area for a bit more complexity in another. If it works for you, fine, that's why you're better off investing directly in the funds.

    In working through the mechanics of what you're doing, I discovered a related downside to the Vanguard brokerage.

    In essence, directing dividends is equivalent to:
    (a) reinvesting the dividends,
    (b) immediately selling the new shares, and then
    (c) investing the proceeds in the specified fund (here, Wellesley).

    One could achieve a similar effect to what you're doing by reinvesting dividends and periodically using automatic exchanges (from the other IRA funds) into Wellesley. In fact, that might even work a little better, because you could control the timing and amounts shifted, rather than being subject to the randomness of dividends.

    It turns out that automatic exchanges are available for funds but not within a Vanguard brokerage:

    Automatic exchange: "Move money automatically between Vanguard mutual funds, on the schedule you choose. Not available for brokerage accounts." exchange
  • edited October 2017

    Thanks for analysis. As you say, it works for me. (And yes, I rebalance yearly.)

    Since brokerage does not allow either directed dividends (or -as you noted- the automatic exchange between funds that you mentioned in above post), I consider brokerage to be inferior to the 'standard' account and would never convert.

    As for the asset allocation 'drift' that you mentioned, the Wellesley fund is more 'conservative' than the aggregate allocation of the entire portfolio. For that reason, I am pleased with the 'drift' that you discussed.

    Note - I mentioned Wellesley as just one example. The beauty of directed dividends (for those that have not given it up by converting to brokerage) is that you can pick ANY Vanguard fund to receive the dividends from any of the other funds.

    Also, to emphasize, while you note in your paragraph ("One could achieve a similar effect ....") - NO you can't if you have converted to brokergage. You can only do this with a traditional non-brokerage account.

    If you think about what I would need to do in a brokerage account to get the same effect, by maintaining my non-brokerage account, I have effectively hired a clerk to periodically move money around for me to feed the RMD distribution accounts (gradually alter asset allocation, ... etc.). The cost to me of this 'clerk' is effectively nothing.

    PS: What - really - are the benefits of a VG brokerage account, versus a non-brokerage account, and how do these compare to 'directed dividends' benefits, as noted above?
  • Again to clarify - I meant that you (or anyone using Vanguard funds as opposed to its brokerage) could use automatic exchanges in lieu of directed dividends.

    Advantages of VBS over individual funds are limited, but they do exist:

    - For Vanguard funds with both investor class and ETF class shares, the latter cost less; of course you'd need a brokerage account to hold the ETFs.

    An alternative is to buy enough to reach Admiral class, assuming you have enough money and assuming Admiral shares exist for the fund; for example VSS has only VFSVX Investor shares, not Admiral shares.

    - You can move money from outside investments to Vanguard funds without being out of the market for days.

    In a brokerage, you have access to the pending settlement proceeds immediately. But if you want to buy Vanguard funds outside of the brokerage (say, you sold BRK.B in a Vanguard brokerage), you'd have to wait days - for the trade to settle and then to place the order to buy the Vanguard fund. Vanguard says this will take at least four days. I suspect that's old info, given the change from T+3 to T+2.

    - Reduced paperwork.

    A single 5498 instead of one per fund (for IRAs), a single 1099DIV rather than one per fund. Personally, I think this is little more than a technicality - handling a few extra papers isn't a big deal, especially if you download the tax statements directly into tax prep programs.


    Curiously, VBS doesn't offer one advantage that I was expecting - the ability to write smaller checks. Checkwriting features of mutual funds usually require some minimum amount for the checks. In Vanguard's case, that's $250. In contrast, brokerages usually have no minimum requirement - you can write checks for a penny if you want. But VBS still has the $250 min.
  • edited October 2017
    msf - thank you for listing of benefits.

    So - if I could summarize (at the risk of putting words in your mouth...) it seems as if the benefits of a brokerage (as opposed to a non-brokerage) account, largely benefit traders, as opposed to investors (i.e., "buy and holders").

    Note: While there is some "reduced tax preparation paperwork" benefit for brokerage accounts, that evaporates when the accounts - either brokerage or non-brokerage - are held in tax deferred retirement accounts.

    Paradoxically then, for Vanguard to promote brokerage, no? I assume that this must come down to costs - since what doesn't at Vanguard? Brokerage must be cheaper for Vanguard and the funds it administers (and which own Vanguard).

    So what I think we have is that Vanguard is promoting a platform for which the apparent initial benefits would seem to benefit traders, rather than investors (an unusual stance for them) except that in the longer run, the impact of lower (assumed) costs in brokerage flow through to the funds in lower expense ratios - benefiting (eventually) both traders and investors.

    However, as an individual - who rarely trades - it would seem that the optimal position would be to maintain non-brokerage accounts to benefit from the flexibility of directed dividends and automatic investment, while at the same time benefiting from the lower expense ratios as everyone else is herded into brokerage.

    ... Having said that (and 'figured' it out) I should say no more on the topic.

    PS: Thank you Anna for this link:
  • The only item I'd disagree with is the speed of moving money between investments.

    If the market goes up more than it goes down, it is preferable on average not to be out of the market longer than necessary. So faster movement is a desirable feature whether you trade several times a month, or a few times a decade.

    Having the funds inside a brokerage keeps your time out of the market to a minimum. Otherwise, one can mitigate the problem with funds if one has a cash allocation. If one has, say $10K in cash, and is moving a $5K investment from security A to fund B, one can simultaneously sell A and buy $5K of B out of cash. Later replenish the $5K with the proceeds from the sale when it settles.
  • Well, I asked this question to my VG Flagship representative:
    We have our self-managed account held in a Living Trust. Would that affect
    a transition? Also, we have accounts with FIDO and TRP, also held in the
    trust. What is the advantage disadvantage of moving them into a VG
    Brokerage account? What constitutes a "trade" with regard to FIDO and TRP
    assets held in the brokerage account?
    If you have investments at other institutions that you would like to consolidate into Vanguard, you would have ability to do so. This can be convenient for
    you, by having all of your assets in one location. However, be aware that
    certain investments may only be exclusively provided by that particular
    institution where the investment may not be accepted by other institutions.

    A trade is still considered the same regardless of which investment you are
    buying or selling. Be aware purchasing Vanguard ETFs or Vanguard mutual
    funds do not have any trading fee.
    There really isn't any incentive for me to convert my self-managed Vanguard account, and I certainly don't want to move my TRP and FIDO holdings into a VG Brokerage account where I would have to pay a fee for buying/selling, I think I'll decline their offer to convert!
  • msf
    edited October 2017
    You would not have to pay a fee to buy or sell T. Rowe Price funds in a Vanguard brokerage:

    Even a partial consolidation has the advantage of dealing with fewer institutions. You don't have to convert existing Vanguard funds to do this.

    That said, there is an advantage in keeping assets at T. Rowe Price if your balance is high enough. At $250K ($100K for grandfathered accounts, I believe), you get a M* premium membership and some advisory services.
  • Thanks for your info, MSF, but it makes me wonder whether the VG Flagship rep was just blowing me off with his response about trades, or I wasn't asking the right questions. He never did address the Living Trust issue. He could have just said that there were no fees for trading FIDO and TRP. Also, I have $1M+ in TRP funds, yet to my knowledge, they have never mentioned Enhanced Personal Services with M* premium membership and free TurboTax. I must not be reading their literature carefully! I'm going to have to revisit the Brokerage transition question again.
  • msf
    edited October 2017
    I completely glossed over your mention of VG Flagship before. My apologies. I'm confident of this Flagship information because I recently went through getting Vanguard to clarify it:

    As a Flagship customer, you get 25 free trades/year. Free (NTF) trades don't count toward that limit, but all other stock/ETF/TF fund trades do count. So if you brought over both T. Rowe Price funds and Fidelity funds, and didn't trade anything else, you'd be able to buy and/or sell the Fidelity funds 25 times without being charged a fee.

    The T. Rowe Price (or Vanguard) funds wouldn't count against that limit because they're already free.

    I'm just guessing, but the rep might have emphasized "buying or selling" because at Fidelity, selling TF funds is free. At Vanguard, the sells could incur fees if you were to go above your limit of 25 fee-waived trades (including TF sells as well as buys).

    Note that you don't have to move your Vanguard funds into a Vanguard brokerage to get the 25 trades. You just need have enough in Vanguard funds for Flagship status regardless of how you hold them (as funds or in the brokerage).

    With $1M+ at TRP, you qualify for an even higher level of service ("Enhanced Personal") there. (No free trades, though.) Free planning services, free WSJ online subscription.
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