What's an investor to do? On the face of it, it lookslike you're being offered something for nothing. Well, you mightnot see the strings attached, but there certainly are stringsattached. (Photo: Shutterstock)

Remember that Twilight Zone episode where the aliens fed thehumans? Based on the 1950 short story of the same name, “To ServeMan” first aired on March 2, 1962. At some point, the maincharacter wonders, “Why do they keep feeding me? Are they genuinelyinterested in my well-being? Or are they just fattening me up?

There's never a free lunch. There's always a catch.There's always an ulterior motive.

We're seeing this concept play out live in that wonderfulcauldron of marketing mischief known as the mutual fund industry(see “The Fiduciary Duty to InvestigateConflicts-of-Interests with 'Zero' and 'Negative' Fee Funds,”FiduciaryNews.com, June 4, 2019). If this doesn't raise your “freelunch” warning radar, nothing will.

It started almost as a lark last summer: Fidelity decided tooffer “Zero” fee mutual funds. It wasn't as though they weren'tgoing to earn money off these things. There was certainly thesecurities lending side of things. A way to make a quick buck offof other peoples' money. Then there was also the upsellingstrategy. That's the whole point of a “loss leader” product.

But then last month the race to the bottom entered a strange,new dimension. It didn't stop at the bottom. It crashed rightthrough the floor.

Now we have a mutual fund that, in essence, pays investors tobecome shareholders. By reimbursing the fund an amount greater thanthe expense ratio, the Salt Low truBeta US Market ETF actually hasa “negative” fee. (At least until April 30, 2020, when theprospectus indicates this oversized reimbursement may end.)

What's an investor to do? On the face of it, it looks likeyou're being offered something for nothing.

Well, you might not see the strings attached, but therecertainly are strings attached.

To understand those strings, you must first understand thepurpose of “Zero” fee or “Negative” fee funds. There simply is onlyone purpose: build market share.

These savvy marketers know full well incessant media reportshave vilified fees, even legitimate ones. This has created a “lowfee” bandwagon, drawing investors from other, perhaps morecritical, factors when making investment decisions. (Incidentally,the same thing is happening with “ESG”-centric investment products.In fact, I'd be willing to wager you can get away with purposelycharging a premium fee as long as the product has the ESG seal ofapproval.)

The cattle prod of “low” fee begets a stampede when you change“low” to “Zero” or “Negative.” Smart marketers realize such achange is enough to overcome the natural inertia of staying put.The horde comes in looking for its pound of something-for-nothingopportunity. And, much to their delight, they find their thirstimmediately quenched.

Eventually, however, all good things must come to an end. Thefree lunch can't go on forever. Once it's milked the market of themost naïve, its fees will regress to the mean.

Except people won't leave. There's a new inertia now and they'vesettled in for the long term.

Or at least until the next “Negative” fee fund comes along.

Maybe that one will be called “It's a Cookbook!”

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