The Biggest Problem in Investing Right Now

Key Concepts

• Financial Advertising Techniques: Transference, Framing, Salience, Shrouding, and Complexity.
• Return Smoothing/Volatility Laundering: The practice of reporting non-market-tested values (Net Asset Values) for private assets to mask volatility.
• Payment for Order Flow (PFOF): A practice where brokerages sell customer trade orders to market makers, often leading to wider bid-ask spreads in options trading.
• Thematic ETFs: Funds focused on specific trends that often launch after the theme has peaked, leading to long-term underperformance.
• Covered Call ETFs: A strategy that caps upside potential by selling call options, often marketed as "passive income" despite reducing total expected returns.
• Total Return vs. Yield: The distinction between headline distribution yields and the actual growth of an investment.

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1. The Mechanics of Financial Advertising

Financial product advertising is designed to maximize firm profitability rather than consumer outcomes. Research indicates that heavily advertised products are typically more expensive and provide incomplete information.

• The "Bullshit" Framework: Ben Felix identifies five psychological tactics used to manipulate investors:
  • Transference: Borrowing credibility from a real trend (e.g., sector growth) and applying it to an irrelevant product.
  • Framing: Using positive, empty language to categorize a product favorably.
  • Salience: Highlighting attention-grabbing features (e.g., high yield) while ignoring risks.
  • Shrouding: Hiding fees, costs, and risks in fine print.
  • Complexity: Making products so opaque that investors default to intuition rather than analysis.

2. Private Assets: Private Equity and Private Credit

Marketing for private markets often claims superior returns and diversification, but academic research suggests these claims are often misleading.

• Return Smoothing: Private funds often report Net Asset Values (NAV) that do not reflect what the assets would fetch in a real market, creating an illusion of stability.
• Risk-Adjusted Performance: Studies (e.g., 2006–2017 data) show that when private equity performance is adjusted for market beta (risk), excess returns are often indistinguishable from zero.
• Incentives: Wealth managers often receive "kickbacks" or fee-sharing arrangements for placing client assets into private funds, creating a conflict of interest that favors the advisor over the client.

3. Margin and Options Trading

Brokerages have shifted their revenue models toward margin interest and PFOF as trading commissions have dropped to zero.

• Margin Risks: Empirical data shows that retail investors using margin trade more speculatively and less profitably than cash-account investors.
• Options Costs: While commissions may be zero, the "implicit costs" of options—specifically wide bid-ask spreads—result in significant losses for retail traders. A 2023 study noted that retail investors lost $2.1 billion in options trading between 2019 and 2021.

4. Thematic and Covered Call ETFs

• Thematic ETFs: These funds often launch at the peak of a trend's popularity. Data shows that thematic ETFs significantly underperform broad market benchmarks, with some Canadian-listed thematic funds showing a 100% failure or underperformance rate over 10–15 years.
• Covered Call ETFs: These are marketed for their "yield," but the strategy caps upside potential. Felix argues that investors are better off holding the underlying asset and selling portions as needed, rather than paying higher fees for a covered call fund that limits growth.

5. Synthesis and Actionable Insights

The financial industry uses "loss leader" services (like free trading) to attract customers, then steers them toward high-margin, high-fee products.

• The "Subsidy" Reality: Savvy investors who stick to low-cost, transparent index funds are effectively being subsidized by the fees paid by less sophisticated investors who fall for aggressive marketing.
• Key Takeaway: If a product is heavily advertised, it is likely highly profitable for the firm and less so for the investor. Investors should prioritize low-cost, broad-market index funds and remain skeptical of products that promise "passive income" or "unique market access" through complex structures.

"If it's highly profitable for them, you can generally infer that it is less profitable for you. You're the one funding the profits." — Ben Felix