Low-Cost Protection

Paul Merriman

I’VE BEEN IN LOVE with index funds for a long time, especially for a reason that doesn’t get enough attention. Lots of financial writers correctly praise index funds for their low costs, low turnover, low drama, massive and easy diversification, and numerous other good attributes.

But the No. 1 reason you should love index funds is they will keep you out of the hands of pushy, unethical financial salespeople. If Wall Street knows you’re committed to index funds, you’ll probably drop to the bottom—where you want to be, I assure you—of cold-call lists used by security salespeople looking for business.

The reason is obvious: The paltry expenses paid by index fund investors will never be enough to satisfy Wall Street’s seemingly insatiable need for hefty sales commissions, sky-high salaries, fancy offices, expense-paid trips and other perks.

Millions of investors seem willing to pay significant annual expenses for actively managed mutual funds. In the popular large-cap blend fund category, the average expense ratio is almost 1%. Index funds typically charge no more than one-fifth that much, and often less than 10% as much.

Even worse—in fact, unconscionable from Wall Street’s point of view—Fidelity Investments offers index funds in that category with no charge at all for expenses. But what’s bad for Wall Street is good for investors. In fact, there’s general agreement among academics and investment advisors who don’t sell products that the most reliable way to boost investment returns is to cut your expenses.

Salespeople often pretend to be our friends under the guise of a professional relationship, and then turn around and do their best to screw us over for their own purposes. Back in 2012, I coauthored a free book on the topic. Since then, things haven’t gotten better.

Consider a 2019 article in Financial Planning magazine under this headline: “Advisor Who Touts His Holiday Giving Faces SEC Fraud Charges.” The Securities and Exchange Commission alleged that the advisor, Keith Springer, most of whose clients are over age 55, failed to tell those clients about millions of dollars in compensation he received for directing their investments into annuities and other high-cost products.

Springer’s Northern California radio show has a tagline that reads “Invest for need, not for greed.” Yet his sales agents were heavily incentivized to sell high-cost annuities, for which they could win free trips, high commissions, and tickets to concerts and sports events. The more annuities they sold, the more benefits they received.

Springer denied the SEC’s charges. “The SEC wants to put us out of business for issues that were fixed long ago,” he wrote in an e-mail sent to MarketWatch. “I’m just an easy target for them. They know I don’t have the resources to fight them properly.”

Sure, I understand that salesmen should be paid for selling what they are paid to sell. But Springer’s sales agents sold annuities, then somehow discovered that they could earn even more rewards by persuading clients to turn around and sell those very annuities—incurring expensive surrender charges—so those same clients could buy new annuities. That, of course, generated new sales commissions.

Great for the sales agent. Toxic for the client. A textbook example of a conflict of interest. Can you imagine somebody doing that to investors in index funds? I can’t either.

Speaking of conflict of interest, Springer’s firm never bothered to tell clients, as it should have, that it was receiving much more compensation from annuities than if the clients had made other investments. Or that the firm received kickbacks from a third-party portfolio manager.

So far, what I’ve described could be called passive deception—failing to tell clients what they have a legal right to know. But it’s worse than that. Think active deception.

You may have heard of “search engine optimization,” a process that involves finding the keywords that are likely to bring visitors to your website. This requires you to understand your target audience and what motivates them. That might seem relatively benign and positive.

But now investment companies, including Springer’s, have discovered a new kind of organized deception. It’s called search engine suppression. It’s the dark side of manipulating what you will see when you search for a company or an advisor online.

Here’s how it works: In the old days of the internet, I used to occasionally search for “pros and cons” related to one of the industry’s largest advisory firms, which spends tons of money on advertising and has lots of fans, but also thousands of detractors.

I would always find enough negative reviews to keep me reading for hours. Of course, I could also find dozens of positive reviews apparently written by satisfied clients.

What’s different now is that I still get the gushing positive links, but only a few negative ones from people complaining about relatively minor infractions like not returning phone calls reliably. I’ve talked to enough clients of this firm to know it hasn’t changed its business model or its practices. As it turns out, the firm seems to have hired one or more companies to suppress the negative reviews.

Suppression companies promise in their advertising that they will use “patented technology” to “bury” negative blogs, articles, legal links and bad press. Now such criticism can be found only by scrolling through multiple pages of search results, far from the top hits.

Investors in index funds don’t have to worry about these tactics because there are no lucrative sales commissions or fees to attract shady third parties. When you invest in index funds, you don’t have to monitor a fund manager or pay attention to the ups and downs of what analysts think of individual stocks. In fact, index funds are boring—and that’s a good thing for investors who want to adopt a strategy and then let it do its thing.

I like to describe index funds as “the sleep-easy investment.” I could write endlessly about the schemes that have been devised to separate investors from their money. But if your money is in index funds, you don’t need to be concerned about all that.

Paul Merriman runs, a site dedicated to financial education. Richard Buck contributed to the above article. Paul and Richard are the authors of “We’re Talking Millions! 12 Simple Ways to Supercharge Your Retirement,” which is also available as a free PDF. Paul’s previous article was Be Suspicious.

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