No one knew better than Jack Bogle (1929–2019) that the interests of the financial industry are diametrically opposed to the interests of the common person. Low-cost index-tracking funds now comprise about 20% of the market for U.S. stock mutual funds, and this share continues to grow. However, Americans’ financial and investing literacy remains low, and those seeking out information are overwhelmed by propaganda from profiteers, which makes it hard to discern the truth.

John Paulson, a wealthy profiteer in the hedge fund industry, surprisingly shared some truth in a recent Bloomberg Opinion column:

“The other thing I love about this business, when I say why I went into this business, is the fee structure,” he [Paulson] added, detailing how much he could make in charging a 1 per cent management fee and 20 per cent performance fee on different levels of assets.

“The more money you manage, the greater the fees,” he said. “Now ultimately we managed over $30bn, and there were years our returns were well in excess of 20 per cent, so to get to those levels, the fees just pour out of the sky.”

The column author (Matt Levine) continues, elaborating on how Paulson profited even while screwing over his investors:

Also if you start losing money you don’t have to give the fees back: “The 63-year-old money manager said that almost 75 to 80 per cent of the money managed by Paulson & Co was now his own capital, reflecting years of disappointing returns that have driven outside investors away”—though also reflecting earlier years of huge returns and huge fees that allowed him to have billions of dollars of his own money in his fund—and “he would consider turning his firm Paulson & Co into a family office ‘in the next year or two.'”

Hedge funds aren’t even open to the ordinary investor; you must be an accredited investor with at least a $1 million net worth excluding one’s home, or income over $200,000 in the past few years. Supposedly, hedge funds are where “smart money” goes; accredited investors are sometimes referred to as “sophisticated” investors, such as in Australian law. This is ironic, because it is foolish to pay 1% per year of portfolio value plus 20% of gains, when active investors are demonstrably incompetent. Above, we see that Paulson had a few good years early on causing foolish investors to pour into his fund, followed by many years of terrible returns that led them to pull out. All along, he collected about 1% per year in management fees plus about 20% of investors’ gains during good years, while losing nothing in bad years. This is highway robbery.

Vanguard, the company Jack Bogle founded, fought profiteering on multiple fronts. They fought against “load fees,” which are sales commissions for stockbrokers that come as a percentage of invested assets. Up until the 1970s, no-load mutual funds were almost unheard of, and it was common for brokers to get as much as 5% right off the top—if you put in $10,000, only $9,500 got invested and they kept $500, immediately kneecapping your returns. Now, investments with load fees are the abnormality. And, although Vanguard has always offered actively managed funds, they pioneered index-tracking funds with much lower fees. Tracking an index, such as the S&P 500, has shown to be consistently better than active management. Most fund managers produce returns that are lower than an index fund. When you add sky-high fees on top of this, you are guaranteed to lose money. Conway (2014) writes in a Barron’s article:

How hard it is to predict who will do well. This isn’t part of the latest S&P study, but the index maker’s previous work on the subject suggests there’s no statistically significant persistence among funds in the highest-performing groups. There’s no new evidence suggesting that’s changed.

When you look at your 401(k) plan, you will almost certainly see investment options that don’t belong there. There are almost assuredly funds in there that charge fees of 1% per year or more, and sometimes a low-cost index fund, with an annual fee of about 0.05%, isn’t even available. The profiteers’ reach is deep, and it extends even to our teachers who are scammed by 403(b) annuity plans, in cahoots with lawmakers and administrators who partner with profiteering companies to only put bad investment options on the table.

Online, the propaganda against low-cost investing is widespread. The industry reaps massive profits while creating little value, not unlike the tobacco companies. They have a lot to lose. This is why there are daily propoganda pieces in the news saying things like “if everyone invested in index funds, it would be a catastrophe” and stuffing Wikipedia pages with propaganda such as “many investors also find it difficult to beat the performance of the S&P 500 Index due to their lack of experience/skill in investing” and purporting that unsuccessful active managers are actually “closet indexers,” justifying high fees while failing to deliver the product (active management) that purportedly produces profits.

In truth, active management is a nothingburger. You pay high fees and get lower returns than an index fund. It’s sort of like going to a bank and paying $200 to arrange to be mugged in the parking lot.

Even without sales commissions, financial advisors and other financial professionals still have plenty of ways to profiteer. They do this via an annual or quarterly fee assessed against “assets under management” that you have made them custodian of, which is usually around 1% per year. Framing this as 1% per year actually does a disservice to the investor, however. The stock market only returns about 10% per year as a long-term average, before inflation which is roughly 3%. One percent of 10% is actually a 10% fee, and if adjusting for inflation, a 14% fee. Would you pay a real estate agent 14%?

On top of this, the investments financial advisors place you in, even if index funds, likely do not have the 0.05% or even lower annual fees that are offered by Vanguard, Fidelity, Charles Schwab, and others. You might see your money in a fund that is substantially similar yet has a 0.5% annual fee, with your advisor receiving a cut from the affiliated company. If you can expect a long-term average of 7% in real returns before fees, then 1.5% of fund and advisor fees gobbles up 21.4% of these returns. Each and every year.

The FINRA foundation’s recent study of Millennial investors found that Millennials are actually eager to work face-to-face with financial professionals rather than do-it-yourself investing or using a robo-advisor. Also, Millennials had no idea that you need substantial assets to work with a financial advisor, and they expected an advisor to take a whopping 5% of assets under management as a fee each year. Such lack of knowledge is kryptonite to achieving financial independence. Even a high income cannot compensate. “A fool and his money are soon parted,” as the saying goes. In this industry, it is not helpful that wolves masquerade as sheep and sheep do not even notice they are being eaten.

The common American does not have access to a hedge fund or even a financial advisor, yet they still have a 401(k) plan available, chock full of bad investment options. There might only be one low-cost index fund available in their 401(k) fund menu, or even none at all. About half of Americans do not invest in stocks at all, and if they do, they don’t know that buying and holding the whole market is the best strategy. This fact is both counterintuitive and pilloried by propagandists in the financial media. To combat profiteering and propaganda by vested interests in the financial industry, financial education is key, but must be coupled with outlawing and derriding profiteering practices. A good place to start is with 403(b) plans for public school teachers. Teachers lack financial knowledge, shape the next generation’s knowledge, and are besieged with low pay, awful pension plans that no one ever gets a pension from, cringeworthy annuities masquerading as investment options, and sales representatives that stake out school cafeterias to cajole them into financial ruination. Therefore, for my forthcoming Education Ph.D. dissertation at University of Central Florida, An Investigation of Investing and Retirement Knowledge Among Preservice Teachers, I am surveying the next generation of teachers to provide (a) evidence to support reforms both nationally and locally and (b) instructional design recommendations for financial education programs.