Warning: This post is a rant and involves some foul language. Enjoy!
Tons of research suggests that people engage in deception and self-deception all the damn time. People are biased. People respond to the incentives they face. Everyone who has ever interacted with another human being knows these things.
Despite this, pretty much every website offering reviews makes claims of objectivity and independence. These websites don’t claim that they try to minimize bias. They claim to actually be unbiased.
Let’s take TopTenReviews, a site I criticized in a previous post. TopTenReviews says things like:
I’ve ranted enough in the past about run-of-the-mill websites offering bogus evaluations. What about the websites that have reasonably good reputations?
NerdWallet publishes reviews and recommendations related to financial services.
Looking through NerdWallet’s website, I find this (emphasis mine):
NerdWallet meets Vanguard
Stock brokerages are one of the types of services that NerdWallet evaluates.
One of the most orthodox pieces of financial advice—with widespread support from financial advisors, economists, and the like—is that typical individuals who invest in stocks shouldn’t actively pick and trade individual stocks. This position is often expressed with advice like: “Buy and hold low-cost index funds from Vanguard.”
Vanguard has optimized for keeping fees low and giving its clients a rate of return very close to the market’s rate of return. Since Vanguard keeps costs low, it cannot pay NerdWallet the kind of referral commissions that high-fee investment platforms offer.
NerdWallet slams Vanguard for not offering the sort of stuff Vanguard’s target audience doesn’t want. Vanguard gets the worst-possible ratings in the “Promotions” and “Trading platform” categories. Why? Vanguard doesn’t offer those things.
Imagine a friend who went to a nice restaurant and came back complaining that her steak didn’t come with cake frosting. NerdWallet is doing something similar.
The following excerpt is found on NerdWallet’s Vanguard review under the heading, “Is Vanguard right for you?” (emphasis mine):
Investors who fall outside of that audience — those who can’t meet the fund minimums or want to regularly trade stocks — should look for a broker that better caters to those needs.
From my perspective, NerdWallet is saying that if you are (a) the typical kind of person that should be buying stocks and (b) you don’t use a stupid strategy, then “you really can’t beat the company’s [Vanguard’s] robust array of low-cost funds.”
So there we have it. Despite the lousy review, NerdWallet correctly recognizes that Vanguard is awesome.
NerdWallet didn’t really lie, but it’s biased.
To be clear, I’m being hard on NerdWallet. NerdWallet does a good job aggregating information about financial services and offers decent financial advice in some areas. The evaluation methodology I’m criticizing may not have been maliciously engineered. NerdWallet may have stumbled into the current methodology. Still, there’s a big problem. Since NerdWallet’s current methodology is good for the company’s bottom line, NerdWallet has a strong incentive not to correct the obvious issues.
Sometimes evaluators aim to create divisions between editorial content (e.g., review writing) and revenue generation. I think divisions of this sort are a good idea, but they are not magic bullets.
WireCutter is one of my favorite review sites, but it makes the mistake of overemphasizing how much divisions can do to reduce bias:
Bias is sneaky
Running Coverage Critic, I face all sorts of decisions unrelated to accuracy or honesty where bias still has the potential to creep in. For example, in what order should cell phone plans I recommend by displayed? Alphabetically? Randomly? One of those options will be better for my bottom line than the other.
I don’t have perfect introspective access to what happens in my head. A minute ago, I scratched my nose. I can’t precisely explain exactly how or why I chose to do that. It just happened. Similarly, I don’t always know when and how biases affect my decisions.
I have conflicts of interest. Companies I recommend sometimes pay me commissions. You can take a look at the arrangements here.
I’ve tried to align my incentives with consumers by building my brand around commitments to transparency and rigor. I didn’t make these commitments for purely altruistic reasons. If the branding strategy succeeds, I stand to benefit a lot.
Even with my branding strategy, my alignment with consumers will never be perfect. I’ll still be biased. If you ever think I could be doing better, please let me know.
- From NerdWallet’s “About us” page on 2/22/2019 (archived here).
- For more, see Wikipedia’s page on the efficient-markets hypothesis. Even if you have the extremely atypical ability to beat the market without getting lucky, chances are extremely good that the opportunity cost of actively trading with your own money exceeds the marginal increase you would see in investment returns.
As an example of experts’ positions, the IGM Economic Experts Panel found strong agreement among a bipartisan group of economists on this statement (archived here):
“Unless they have inside information, very few investors, if any, can consistently make accurate predictions about whether the price of an individual stock will rise or fall on a given day.”
- I’m skipping over a lot of nuance here. Different funds track different markets which each have their own rates of return.
- See NerdWallet’s 2019 review of Vanguard (archived copy).
- I’m not confident this is the worst rating any company gets, but it’s the worst one I could find with a little bit of looking.
- A table with ratings for each category and details can be found under the heading “Vanguard at a glance” in NerdWallet’s 2019 review of Vanguard ( archived copy). The scores for both the “Promotions” and “Trading platform” categories are detailed with “None.”
- “The following minimums apply to individual and joint accounts, Roth and traditional IRAs, UGMA/UTMA accounts, and most other account types…
- $1,000 for Vanguard Target Retirement Funds and Vanguard STAR® Fund.
- $3,000 for most other Vanguard funds.”
- If you’re buying stocks for entertainment or learning, it might be reasonable to put small amounts of money into them. NerdWallet doesn’t seem to be targeting people buying stocks for those reasons. It’s only worth investing in stocks for financial reasons when your expected return is sufficient to outweigh the fees and time involved in setting up a brokerage account. With under $1,000, the costs will probably outweigh the benefits.
- I admit there are rare exceptions, but I want to emphasize that I think they are extrememly rare. Even if you have the very atypical ability to beat the market (after fees) without getting lucky, chances are good that the opportunity cost of actively trading with your own money exceeds the marginal gain you get in investment returns. If you are talented enough to beat the market, you’re probably smart enough to do things that people will pay a whole lot of money for (e.g., you could work for a hedge fund that has far more capital at its disposal than you do).
- From WireCutter’s “About Us” page (archived here).
- In many cases, guesses aren’t even necessary. E.g., commission rates offered by Amazon’s affiliate program are publicly available.
I’ve archived a copy of Amazon’s fee schedule here (accessed 2/25/2019).