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The best investment advice you'll never get

For 35 years, Bay Area finance revolutionaries have been pushing a personal investing strategy that brokers despise and hope you ignore.

If Solli is an industry gadfly, Geddes, a modest, unassuming son of a United Church of Christ minister, is its chainsaw massacrer. “We work in the most overcompensated industry in the country,” Geddes admitted before the water was served, “and indexing threatens the revenue flow from managed funds to brokerage houses. That’s why you’ve been kept in the dark about it. This truly is the great secret shame of our business.

 

“The industry knows they are peddling bad products,” Geddes continued, “and a lot of people making the most money and getting the most prestige are doing so by gouging their customers.” And Geddes is quick to differentiate between “illegal theft”—the sort of industry scandals Spitzer has uncovered, such as illicit sales practices, undisclosed fees, kickbacks, and after-market trading—and “legal theft,” the stuff built into the cost of doing business that no attorney general can touch, but which in dollar amounts far exceeds investor losses to illegal activity.

Geddes wasn’t always full of such tough talk about the industry. Not that he had any qualms about speaking his mind; in fact, he was let go from Morningstar in 1996 for being openly critical of the company’s internal culture. “I still think of Morningstar as a potentially positive force in the industry,” he says. “But let’s just say they were weak at conflict management, especially at the senior levels.” It wasn’t until he took a freelance consulting job for Charles Schwab that he really saw the light about indexing.

“My job was to compile all the academic research on mutual funds, and that’s when it really became clear that active management doesn’t add any value,” he says. When he finished the project, Geddes started teaching a finance class through the University of California extension, where he started preaching his anti-industry gospel. “I had to be careful, because there were a lot of brokers in the class. I started noticing that some of them would get sort of irritated with me.”

Around this time is when he met Solli. Solli had a client, a doctor who was looking to learn about portfolio management and asked Solli what he thought of Geddes’s UC course. When Solli looked into it, he was bowled over. “Here was this guy who’d been CFO at Morningstar and had this incredible background, and I thought, what the hell is he doing at Berkeley teaching this course to guys like my client? This is too good to be true—I have to meet this guy.”

Slowly, inadvertently even, Aperio was born. But the fit was perfect. Geddes brought what he calls “the quant piece” to the table; Solli had the strategic vision. After a few months of brainstorming, they set out to see if a couple of guys who held themselves to high ethical standards could make it in the cutthroat financial industry.

And just how do these guys make money if they keep kicking out clients like me once they switch us into index funds, while alienating others with their irreverent critique of the entire mutual fund game? Geddes does take referrals from investment firms like Charles Schwab, which thrive on the sale of managed mutual funds. So why the rant? Isn’t he, too, in business to make a buck?

“Absolutely,” he admits. “I’m not Mother Teresa; I’m a capitalist who wants to succeed and make money. I just think the best way to do that is by building trust in a clientele by revealing to them honestly how this business works.”

Geddes also offers a customized version of indexing (on taxable returns) for wealthier clients, a service that requires an ongoing relationship and supplies Aperio a steadier source of income than my low-six-figure portfolio did. Aperio now has about $800 million under management. It’s a paltry sum compared with those of the big brokerage firms, which deal in the billions or even trillions, but Geddes is fine with that. “If I were making what I could be making in this business, I just wouldn’t like the person I’d have to be.”