Outside the Box

Nov. 13, 2021, 11:24 a.m. EST

The No. 1 reason to buy index funds

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By Paul A. 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 attributes.

But today I’m going to repeat something I wrote in 2014: The No. 1 reason you should love index funds is they will keep you out of the hands of pushy, unethical salespeople and brokers.

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, fancy offices, expense-paid trips, sky-high salaries and other perks.

Millions of investors seem willing to pay significant annual expenses for actively managed mutual funds.

In the very popular large-cap blend fund category, the average expense ratio is 0.98%. Index funds typically charge no more than one-fifth that much — and often less than 10% of that.

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 advisers who don’t sell products that the most reliable way to boost investment returns is to cut your expenses.

None of this is new, of course. But recently all this was practically shoved in my face by a news article about how systematic the scam artists have become. Salespeople often pretend to be our friends under the guise of a professional relationship, then turn around and do their best to screw us over for their own purposes.

In 2012, Richard Buck and I spelled all this out in a book called Get Smart or Get Screwed: How to Select the Best and Get the Most From Your Financial Advisor. The book is available free, and I recommend it.

I’m sad to report that things haven’t gotten better, as I learned from an 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 adviser, Keith Springer, most of whose clients are over 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.

Now sure, I understand that salesmen should be paid for selling what they are paid to sell.

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