One CEO's fight against deceptive index return reports

When Mark Hebner launched Index Fund Advisors, he likely didn’t expect that, 25 years later, a routine client presentation revealed what he describes as misleading index returns.

“It was our own display for our clients that initiated this,” said Hebner, founder and CEO of Index Fund Advisors. “If it wasn’t for that, I don’t think I would have ever noticed this myself.”

After noticing the glaring mistake, Hebner came to notice a persistent misrepresentation of index returns by virtually all major media outlets and data providers. Hebner has become increasingly vocal about what he calls a systemic accounting error in the way stock market performance is reported—specifically, the omission of dividends from widely cited indices.

“The biggest misconception is they might think that the return… in 2024, of the S&P 500 was 23.3% when, in fact, it was 25.0%,” he said. “When companies issue dividends, their price is required to be lowered by the amount of the dividend… it’s a FINRA rule.”

It’s an accounting reality that is greatly overlooked, according to Hebner. He gave a simple example: If a stock worth $100 issues a $5 dividend, its price drops to $95 the next day.

“If you don’t add back the dividend, you have misrepresented the value of those shares,” he said. “It is an error in the accounting of returns.”

For Hebner, his push for advocacy is rooted in a desire to see more integrity in reporting.

“There is no return calculating software that would not consider those dividends,” he emphasized. “It’s shocking that we’re still looking at price-only returns or indices. There should basically be no price-only indices—they should be canceled.”

That lack of awareness persisted, in part, because Hebner and his firm relied on data sources like Morningstar and Dimensional Fund Advisors—academically rigorous outfits that default to total return.

“They always show total return without designating it, by the way,” he noted. “The gap between these is between 2 and 3% a year… it’s insane that we’ve left this out.”

Resistance has come from both media outlets and the index providers themselves, Hebner says. Even the Association of Index Providers, after agreeing with Hebner’s argument, backed away when members expressed “no appetite for change.”

Hebner is considering regulatory action due to the high consequences of accounting mislabelling, an indication of his disillusionment.

“I’ve thought about doing it a couple times … filing a complaint with regulatory agencies like the SEC,” he said. “That this information being shown by virtually all financial media is misleading. And that’s a key word for regulators.”

The inconsistency distorts not just perception, but actual investment decisions according to Hebner, who points out that investors often make quick decisions based off media reports.

“If you’re watching CNBC, you will see the total return index for Germany and all other ones, the price-only. But because they’re doing it day by day, you don’t really notice these differences.”

Even major platforms like Morningstar can be inconsistent according to Hebner.

“Right on their website, they have the default index be the total return,” he said of Morningstar. “But when it comes to the public site… they only show the price-only index.”

Despite the rise of evidence-based investing, Hebner believes there is still a long way to go in ensuring complete transparency for consumers.

“Even among professionals, there’s a very small percentage of them that understand that this is even being shown to them,” he explained. “Including myself.”

FINRA Rule 5330 lies at the core of Hebner’s argument.

“It’s the same rule as stock splits,” he said. “A dividend issue is like a stock split. For every share at $100, if you reinvest, you now have 1.05 shares at $95.”

He was stunned that even some academics are unaware of the FINRA regulations, something Hebner argues is symbolic of a general sense of complacency towards these accounting rules.

“Sam Hartzmark (professor in the Seidner Department of Finance at Boston College) … didn’t know about FINRA Rule 5330,” Hebner said. “He was just saying that the price would eventually adjust because it doesn’t have that cash. But it’s not that—it’s far more rigorous than that.”

He sees a fundamental disconnect between what’s required for accurate accounting and what’s commonly accepted.

 “People often say you have to add the dividends to the share price,” he said. “It’s more accurate to say you have to add back the dividends because they were subtracted.”

For now, Hebner continues to campaign for change, pointing to his website where research papers and charts show the full scale of the discrepancy.