The NewRetirement Podcast

Aperio - Unveiling Financial Innovations and Ethics

Episode Summary

Aperio podcast features Paul Solli and Patrick Geddes, co-founders of Aperio, discussing their journey in the financial industry, the evolution of Aperio, and insights on financial literacy, the effectiveness of financial services, and the future of finance. The episode emphasizes the importance of ethical practices, financial education, and the need for better financial solutions for the mass affluent.

Episode Notes

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Transparent Investing by Patrick Geddes

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Episode Transcription

Introduction: This episode is brought to you by the new retirement planner, create a financial plan for free at 

Steve Chen: Welcome to the NewRetirement podcast today. We're joined by Paul Solli and Patrick Geddes, two of the three minds behind a period, Guy Lampard couldn't join us today. And also we only have three microphones, so it's going to, it's going to work out. The period was a firm known for helping people with direct indexing.

And we're going to dive into what that means a bit later. And it grew to an AUM of about 42 billion and was ultimately acquired by BlackRock for over 1 billion in 2020. Aperio meaning is to make clear, to reveal the truth in Latin, and it encapsulates their mission of bringing clarity and truth to the world of finance.

And so while Aperio shifted from aiding mass affluent individuals, To serving some of the world's wealthiest people. I know both Patrick and Paul have a deep desire to improve the financial outcomes for as many people as possible. [00:01:00] Paul had a long career as a CPA, bank consultant, VP at Salomon. He started his own company, Financial Design Corporation, and then co founded Aperio.

And Patrick was the CFO and a research director at Morningstar. He taught graduate level portfolio theory at UC Berkeley, and is the author of Transparent Investing, in addition to co founding the Aperio Group. And in this episode, we're going to talk about their journey and building a period, discuss key topics like financial literacy, how the financial system works and their vision of the future of finance.

So with that, get ready for a pretty insightful conversation with a couple of folks that have a deep background in financial services and a great perspective. Paul, I want to start with you and if you could give us, you know, a few minutes on how your career unfolded leading up to Aperio and a bit about why you decided to co found the company.

Paul Solli: Okay, boy, so that should take about an hour and a half. I feel like I should be looking at Guy Raz and how I built this. So I went to a public university, University of [00:02:00] Massachusetts, otherwise known as ZooMas. They were famous for what they call heterodox economics, which was almost Marxist, you know, it was a mishmash of neoclassical, Marxist, communist, capitalist, everything.

So I think sort of from the start I had a contrarian view, but because it was called ZooMas, I was an econ major, so because it was called ZooMas, I would go over to the Amherst College Library. to, um, study. Now I call it hyperlinking ideas. I used to, as a break, go into the magazine area and read different magazines to get different ideas, and, um, there was a UChicago Law Journal.

And I picked it up and there was some article in there. I think it was by Eugene Fahm, I haven't been able to track it down, but it was talked about efficient capital markets and the efficient capital market hypothesis that said, you know, don't try to beat the market. All the available information gets pretty quickly incorporated into the prices of stocks.

And I thought, wow, that's a really, really interesting idea. So that was actually my junior [00:03:00] year, 1978. And I think the first index portfolio was started in 72 or three at Wells Fargo and the first index mutual fund was started by Vanguard in 75. So early on sort of going, wow, this is an interesting idea.

And then sort of made my way as I, I majored in economics and accounting, worked as a CPA for Peat Marwick, and then went to work for Bain, and then joined Wall Street, uh, firm of Salomon Brothers, made famous by Michael Lewis in Liar's Poker. That's a great book. Yeah. My boss was the human piranha. And Very quickly, actually, I started covering the big index deliverers.

So, Wells Fargo became Wells Fargo Investment Advisors, became Wells Nikko, became BGI, but when it was Wells Fargo Investment Advisors, Wells Nikko, I was covering them and BNY Mellon. And so, sort of early on, got a window in efficient capital markets and then started working hands on with those firms. Sort of fast forward, uh, started a wealth management firm with a partner [00:04:00] and during the course of that, had a real bias towards indexing.

And constructing portfolios for clients using mutual funds from places like Vanguard and DFA. 

Steve Chen: You said you learned about the markets and efficient markets in, in college. Did you have like a vision for your career from that moment that you were like, hey, I really want to get into financial services or did it emerge over the course of your career?

Paul Solli: You know, I think it's fair to say it emerged. You know, I think the idea of simplicity and also I think Patrick, I think, and I both share this, which is when you see something that's conventional wisdom, you can beat the market. Mm hmm. And then you start to maybe think that's wrong. It's like with psychedelics, you know.

People think that psychedelics were all bad based on the war on drugs, and now we're finding out that they've got huge mental health applications. And, uh, so it's sort of like, hmm, this is intellectually interesting, but also we're both kind of disturbers, I guess you'd call it, and and sort of like, okay, we can go in there and start arguing with people [00:05:00]

Steve Chen: Yeah.

Paul Solli: About their views. And what is conventional wisdom? 

Steve Chen: So the firm you mentioned starting, was that Aperio, the advice firm? 

Paul Solli: No, the advice firm was a, a wealth, so that was the other thing. So it bothered me that people were giving financial advice and getting paid for it by selling products where they got commissions.

I saw a conflict there, and it was sort of the beginning of what they call the fee only advisory era and Schwab Institutional had literally nearly, I think it started in 92. So Schwab Institutional started to support the fee only advisor. And so I and another fellow started a firm called Financial Design to manage portfolios using mutual funds, custody to Schwab, focused on index funds and then doing financial planning and financial education and a financial publication called Financial Design on Schwab.

Uh, so the whole idea was to sort of jump on the fee only revolution and tell people, you know, these people who are selling you products [00:06:00] are not fiduciaries. 

Steve Chen: Yeah. 

Paul Solli: They're not doing it in your best interest, they're doing it in their best high fee 


Steve Chen: Right. And that debate continues today and it continues to evolve with some new regulation. So before we shift over to Patrick, what led you from that company to Aperio? 

Paul Solli: Well, actually, I'd say it was not a healthy partnership. And I say that today, we did a really good exit as you know, selling Aperio to BlackRock. And I say to this day, if I'd had the same group of people at Aperio at financial design, I think that would have actually been an even better financial outcome than Appario was.

So it was, it was kind of a dysfunctional group, even though I had a fellow named Bill Jenke with me as one of the pioneers of index investing. His wife actually was Patty Dunn, who was CEO of BGI. But we just. Couldn't coalesce and be effective as a group and create this firm that would try to consolidate the fee only industry 

Steve Chen: Okay, got it. All right. Well, look I'm gonna hand it over to Patrick, cuz I'm super curious [00:07:00] how and Patrick I do want to dive into your background. Well, actually, why don't you give us your background and then share the story of how Aperio created. 

Patrick Geddes: Sure. So I got my MBA at the University of Chicago in the 80s and then worked for an oil company for five years, which was actually a lot of fun, very intellectually stimulating.

And it's where I learned how to do risk adjusted after tax cash flow. Then I threw a friend, got the job as a head of research at Morningstar and I was there and then became CFO for three years, was, uh, actually sacked. I was, I was fired. And, uh, move back to the Bay Area where I'm from and, uh, was trying to build my own wealth management consulting business, which was a complete flop, total flop.

And then Paul calls me up. Uh, he'd read that I was teaching a course at UC Berkeley extension on, uh, portfolio theory and using a fancy model that really interested him and, uh, he said, well, we should meet and I'm like, sure, whatever. I don't [00:08:00] have great radar on starting companies. So we talk, realized this incredible commitment on the ethics side and interest on indexing and how can we deliver this?

And we talked about a lot of different angles. And then, uh, I don't have the same entrepreneurial inclination Paul does as, for example, when he said, you know, we could start a company. My reaction was. You can do that? Which is not how entrepreneurs talk. They are always very clear on all the opportunities.

So we, uh, kind of stumbled into this thing, and then it turned out to be a really good fit because we brought such different skills to it where it was very clear that either of us alone was worth a lot less than Domination. 

Paul Solli: Patrick, I just want to ask you, what was the name of the first name we came up with for the company after a big brainstorm in Chicago?


Patrick Geddes: Paul, really liked the idea of giant bags of money. We did not go with that one. It was a play on the motley fools. 

Paul Solli: And can I just add, when, when, when the idea came up, I had a doctor who [00:09:00] every doctor wants to be a money manager and he was taking a course at UC Berkeley and he said, can you take a look at this course and tell me what you think?

And there's a guy named Patrick Geddes teaching the course. And I looked at his background. You know, CFO, head of research at Morningstar. I'm like, wow, this is about the most marketable resume in America. For Paul. What the hell is this guy? What the hell is this guy doing on the second floor of a kind of a crappy looking office in downtown San Rafael under the heading Geddes Consulting?

He must be some odd duck. And sure enough, you know, take a look. 

Steve Chen: Okay. So you guys didn't really know each other before this company came together. That is really surprising. And what about guys? I know he's not here, but I'm curious how he came in the mix. 

Paul Solli: Well, it's interesting. We actually call what we do the, you know, asking people to jump on the hippie bus.

You know, it's sort of like drive down the road and you see people that look interesting, you chat with them and you sort of go, Oh, you know, you want to, you want to hop on and see what happens, and so Guy was introduced by a guy that actually used to be head of wealth management for Goldman out here on the West Coast and came [00:10:00] into our office and said, hey, really like what you're doing.

I think I can help you. He was head of sales, institutional sales, et cetera, for Montgomery securities and he said, I'll, can I just sit in your office and contribute, and if you think I'm worth something, maybe you'll give me, you know, a salary in equity one day and I think that lasted for about a year, and he did contribute, and, and, and in fact, maybe this is getting ahead of things, I attribute Guy You know, if you're in the oil exploration business, you can be drilling a hole and not getting anything.

And you can be doing that for a long time. And then, you know, really savvy geologists can come over and say, you know, maybe move the Derek a little bit over here. And guys, the one that came in and said, you know, you guys aren't getting a lot of traction in the high net worth space. You know, maybe you should move the Derek over to the ultra high net worth space.

Um, we sort of hit the gusher there, right? 

Steve Chen: Yeah. It's so interesting as an entrepreneur to hear, I am always fascinated by other founding stories and how things came together. So normally what I hear, you know, and you see is [00:11:00] like, Hey, people knew each other and maybe they had some shared background and then they kind of came together to start something.

So the fact that Paul was like, Hey, I have this idea randomly calls up Patrick or finds you and says, Hey, you should come over and let's start working together. And you're kind of banging around and then I think the guy thing is actually awesome that uh, This is a great signal. We have some of the same stuff happening at North Harbor People are like we like what you're doing, you know, we'll just come pitch in people that do that one, they're usually talented because they're willing to bet on themselves, essentially.

It's also a total counter signal. When people come in and they're like, I want a lot of stuff up front, trust my resume, bad signal very often. It's like, and then people are like, I deserve a ton of credit for all this or that. I think that's also a very tough signal to see, but no, it's great. And then the fact that he really helped you make good decisions on where to apply your innovation.

And then you rewarded him for that. Cause I know you treat him as a co founder, even though he joined a little bit later. 

Paul Solli: Yeah. I mean, part of it is that I actually [00:12:00] learned this lesson in the first company. It didn't work. I mean, being generous, not being greedy is good karma. 

Steve Chen: Yep. A hundred percent. I agree with that.

So I would love to hear a bit about how Aperio evolved. So you had this great vision. Let's help the world. You started with. I guess the mass affluent, those are what people that have 500, 000 to a couple million bucks or something like that, 

Patrick Geddes: maybe a little higher. And we thought we would probably go direct, they would hire us directly.

And that was not an accurate prediction. 

Steve Chen: Well, can you describe, and then I know you ended up shifting to the ultra no high net worth. So I'd love to hear what is a period core innovation, you know, the value that you bring, I mean, obviously getting bought for. A billion dollars and like aggregating a bunch of assets.

Clearly you're bringing value to the world, but like how do you see that and how did your business change so much as you, as you moved it from one market segment to another? I 

Paul Solli: mean, I think the key innovation is if, if you have. [00:13:00] An understanding of why indexing works, the broad diversification and the low fees.

You can appreciate that you can take a subset of the universe of stocks and assemble them in a way that will do the same thing. You know, whether you have five, I mean, I think Burton Malkiel wrote a paper once that said, you know, you need about 20 stocks to get sufficient diversification. And then as the world changed, he updated and said, you know, you probably need more like a hundred.

But you can put together a portfolio with, you know, probably even a hundred, but two, three, 400 stocks that in reassemble them in a way that tracks pretty much any index. One thing about mutual funds is you're not allowed to pass through the losses inside the fund and if you own the stocks individually, you can.

And so there were already firms like parametric managing individual portfolios of individual stocks and passing through those losses. You know, I think our innovation was just taking [00:14:00] that and thinking more, more specifically about customization and what we call hyper customization. So we started saying, you know, we can not only track, let's say the S& P 500 and do a lot of tax loss harvesting and give those losses out to investors that can use them that is basically an after tax alpha, but we could use the model, the multi risk, multi factor risk model that we would use to track the index also.

Replicate active strategies. So Jeremy Grantham came out with a quality strategy and our CIO member came up to us and said, hey, you know, it's four factors in the bar model. So we can come out with a product that looks like his product, but he charges 1%. We can charge 2100 to 1 percent and his is tax inefficient and we can generate tax alpha.

And we can customize and we can do ESG. So it was recognizing that we could use these models to, uh, not just generate tax losses, but to replicate active strategies and to start incorporating socially responsible screens, ESG screens. Okay, that's awesome. Patrick, [00:15:00] any, you want to 

Patrick Geddes: add to that? Just the, it was the confluence, as Paul mentioned, bringing that Customization with also, uh, what we always call a consultative approach, as opposed to the standard for the industry tends so much toward I got these products, which one's going to fit for you.

And we would always start with. What problem with your portfolio you're trying to solve and is there anything we could do to help given that flexibility and it happened to hit at a time when indexing went from popular to dominant and when The industry because of technology went from you get the standard product to oh especially the ultra high net worth you want everything built to your specs And that, uh, was just a very fortunate confluence of, in addition, the big independent RIAs, the Registered Investment Advisors.

As a segment of the market, really dominating, uh, compared to how it had been a more, a smaller player compared to the [00:16:00] wire houses and all of that kind of came together at once and we were, you know, we were often asked, what's the secret of your success? And one of the answers was stand in the right place and we happen to be in the right place at the right time. Right. 

Steve Chen: It feels like for a period, the value, and I think Paul, we talked about this, there's more value if you have more money. What was your customer base? What did they? What do they look like? 

Paul Solli: So we went from running down the hall screaming great success for every million dollars separately managed account to deciding that that didn't have the economies of scale that we needed given our business model of hyper customization.

So we, we started focusing on intermediaries. So we had the large registered investment advisory teams. We had the family offices, multi family offices, and then we also focused on the biggest teams, uh, within Morgan Stanley, Merrill Lynch, and then Goldman Sachs, 100 percent focused on intermediaries. Uh, and that really gave us leverage because we're focusing ultra on the high net worth.

The average account size [00:17:00] was big, so it supported us doing a lot more consulting for each, each problem that advisor brought us. 

Steve Chen: Do you see, so one thing that tends to happen is, hey, there's innovations that wealthier people get and then over time, those innovations make their way down to less wealthy people.

Do you think the hyper customization works if you have a couple million bucks or is it not that valuable? You just don't need to do it. 

Paul Solli: I know, I know who should answer that question because he's working on that now. 

Patrick Geddes: So it's fascinating to watch how popular what's now called direct indexing. Has become, and especially a kind of over hyping of it, where if this works for the ultra high net worth, it's got to be great for everyone and in fact, so the customization part is a good thing, but the challenge is that you really have to drill down to the tax situation for each investor because the size of your bracket and the amount of your [00:18:00] gains makes an enormous difference. So the ultra high net worth really do get a lot of value, but unlike a lot of the innovations you mentioned that do move down to more democratized There are a lot of people who don't have huge amounts of money that shouldn't be doing direct index For example, the irs data show that 92 of us tax returns have no capital gains. So there's this weird phenomenon of This great creative idea getting introduced to everyone without the caveats.

I mean, we were always big at caveats throughout the evolution of a pair. Like it depends sometimes it's great, sometimes not. And this boom in direct indexing is a fascinating mixture of becoming more broadly available, which is generally a good thing, but with very little discrimination around a lot of people are wasting their money on this thing, especially the folks offering it at the lowest levels and the highest fee.

Paul Solli: At least 92 percent [00:19:00] of Americans that file a tax return shouldn't be in direct indexing. What if direct indexing were free? In other words, you can get a zero fee mutual fund that tracks the S& P whatever at Fidelity. Let's say they just said, oh, would you like tax loss harvesting with 

Patrick Geddes: that? Even there, because there's a, you can shelter up to 3, 000 of ordinary income, there are cases, but it's still Um, I think there's a default to the sexy, fancy product and it's being sold based on a higher revenue than for the right reason.

So it's fascinating. I, you know, personally, I've been touting this strategy for, uh, almost 25 years and now watching what's going on thinking, Oh, this is getting a bad rep. And I wouldn't be shocked if there was some kind of pushback because it is getting oversold. 

Steve Chen: Well, it feels a bit like ESG where people are like, hey, ESG is going to be [00:20:00] the second coming.

Initially it was interesting watching financial survers initially people were like. Okay. This is actually a waste of time. Then I think they saw, Oh, Hey, millennials and Gen Z really love ESG. So guess what? We love ESG. Then they market the heck out of it. And then, then I see the Bogle heads and they're like, you know, ESG actually, it's like from an investing perspective, it can not be great.

And it's a little bit of a, I think people have different points of view on it, but you know, you see financial services grabbing these ideas and directing them to another pattern match where it's like, Oh. Hey, here's something sounds cool. Maybe a little complicated works for rich people. Rich people do this.

Yeah, you should do it. Absolutely. 

Paul Solli: Yeah, and then we said have an expression at our at our company, which was what's social responsible about high fees It's more work to do the screening and do whatever it takes to deliver an ESG or SRI fund so it should have high fees but then people tend to charge higher fees than the labor involved in doing that and then they, I think, mistakenly started selling, uh, ESG or SRI [00:21:00] as an alpha generator.

And like all alpha generators we've seen over the last four decades, you know, sometimes they win, sometimes they lose, but the fees always win. 

Patrick Geddes: But your, your analogy, Steve, of direct indexing was similar in that the industry glommed onto this? From 20 years ago where many advisors would say That's the stupidest thing i've ever heard.

Oh, you want it? No, maybe it's not so dumb to today I'm, actually in a film group with someone who was heavily pitched ESG, even though she didn't want it and she kept saying, why are you forcing this on me? And I was fascinated at the weird turnaround from scorn and dismissal, often for the wrong reason, to pushing it, often for the wrong reason, to someone who didn't want it.

And so it is very analogous. You know, industry pushing stuff that generates a lot of revenue and it happens to be the hot topic to show her.

Yeah, it's interesting. So, and Patrick, just last thing on this, Paul was saying you're working on [00:22:00] something in this space? 

Just, I've done some work on the math around that and it's something the industry pushing, direct indexing, doesn't want people to see necessarily, which is a lot of times this is not a good idea and you need to be careful is true of all investing.

Sometimes it's terrific, sometimes it's, uh, it's just awful. John, uh, uh, Reckenthaler, excuse me, Morningstar wrote, uh, three blogs earlier this year on that topic. He did a great job of saying for his main readers, it's not necessarily a great thing, but then he added a whole blog post saying, but for the very wealthy who have a lot of stuff like hedge funds or active strategies.

It's amazing in the value it adds, and it's that distinct, I always like to say, it depends is a bad sales conversation because you just want to say, yep, it's great. I don't, it doesn't matter who you are. This is the best thing since sliced 


Paul Solli: Yeah. And I've got no, I've now having sold the black rock and I'm not involved in the [00:23:00] industry at all and I've got no horse in this race, but I think I would hazard a guess over a. 10, 20 year horizon that for a high tax investor that's got gains to offset, I mean, this strategy probably beats close to 100 percent of, of strategies out 


Patrick Geddes: Yeah. Close to 100%. You've seen the latest, uh, SPIVA. So S& P just started doing after tax comparisons, 98 percent it's equal weighted, but 98 percent of funds failed to outperform on an after tax.

Yeah. And is that survivorship adjusted? 

Paul Solli: Believe so. Okay. But yeah, there you go. So 98 to a hundred percent, you know, so you've got, it's incredibly high bar.

Steve Chen: Yeah, that's amazing. I think one of the things that's resonating about what you're saying is from our perspective, we're, we're trying to use math and just data to understand what works best for a person.

To your point, hey, if you have a lot of capital gains and then there's this tax alpha for your direct indexing innovation, it works [00:24:00] right and, but then for many people, it doesn't work and I think from when we look at the world, we're kind of thinking about, Hey, you know, if we can understand a person's situation with a higher level of resolution, we can suggest strategies that are appropriate.

And if you use the math behind them, you can see that, like why this would make sense. And I, that I'm not saying we're there yet, but directionally. That's where we're headed. Cause there's different, there's a billion trillion different strategies people can use and, uh, and portfolios and so forth. I mean, we're, we're kind of still at the, kind of the broad strokes of just like, Hey, being literate and saving appropriately, right.

Being thoughtful about like when you retire, how you use other benefits, social security and stuff like that. But then as you get wealthier and you have different nuances, like should your portfolio be constructed differently? Should you be more, more focused on taxes, stuff like that all comes into the picture.

Okay. Before we move on from a period, Paul, what would your top three insights and maybe lessons be from building that company? 

Paul Solli: Okay. So the entrepreneurial lessons, 

Steve Chen: yeah, I think [00:25:00] both, it'd be interesting to get both your entrepreneurial lessons and then also maybe what you would have done differently if you had to do it again.

Boy, I'm not sure I'd do anything differently. You know, it's, uh, I used to have a poem by this Danish physicist that I had taped on my lamp on my desk that said, TTT, things take time. One of the lessons is things take time and you better, if you're going to be an entrepreneur, figure out a way to Hang in there because we wasted a lot of time going after the wrong market for the first few years and if we hadn't given ourselves the time, no Aperio.

The other one is be generous. Get people feeling like they're all riding the same hippie bus. You know, we've always been about 100 percent transparency, ethics, you know, live an ethical life and reflect that in every single thing you do including how you deal with, you know, the golden rule. I mean, live the golden rule.

Uh, actually we had, we had somebody, maybe it was you, somebody said, uh, you know, if I can summarize the four [00:26:00] partners, Patrick, you're about the truth is sacred, Paul, you're about the golden rule, Bob, you're about the client is sacred, and Guy was Respect. I think I'd modify Bob's a little bit by saying it's, it's, the employees are sacred because if you're not treating the employees well, they're not going to treat the clients well.

Steve Chen: That's great. Patrick, how about you? 

Patrick Geddes: Everyone's claiming they're acting ethically. Real ethics hurts. You're losing money or business opportunities or something. That's when you really test it. And a company claiming they're ethical means nothing. You've got to look at the behavior, and you can, I would agree, ask, and people would ask, what's a pair of success about?

Don't crap on people. What people? Your clients and your staff. Like, treat your clients the way you want vendors to treat you. Treat your staff, if, one of the lines I used to say as CEO was, if I wouldn't want to work here at the lowest level on the totem pole, then I've been a utter failure as a CEO, [00:27:00] not that's a box.

I failed to check utter, utter failure because so there's a, another piece that, I learned from my partners on other is, humility when you're crafting that blend. It's like building a portfolio of the portfolio of skills, you got to be really clear on what you're good at. That generally people are okay.

What they're not so good at is what they're bad at. Don't pour energy into the stuff you're bad at and that's very hard to get right and and for me, the. The real pride is not the financial outcome. It's that the marketplace actually valued ethics and that's, that just feels extraordinary that we were able to.

Persuade that many people bring us the business around that, that ethical core and you know the bar is not all that high in any business certainly financial services but that's the part that really makes me feel good about the past

Paul Solli: Can I just say this is gonna be kind of a weird maybe slightly off topic comment on this, but [00:28:00] we really did try to build a firm where people like to work and I was actually foil surfing with a friend of mine and I was using his foils and I got into sort of a dicey area and he started yelling at me.

I just thought, wow, that's really inappropriate, and I went up to him and I said, you know, don't ever, ever, ever do that, or that's the last time, and one of his employees came up to me and said, thank you for saying that, you know, this fellow creates a bit of a toxic environment around that, and it just makes it harder on all of us, and that's the first time that somebody really put them to the mat and I guess what I would say is if you're in a company where stuff like that happens, don't be scared to come up to 

Patrick's, be aware of the price. I mean, do it with open eyes, but you know, if you've got these tendencies, go see a coach.

Steve Chen: Our company is now 50 people and we have all kinds of folks in it.

Right. And I definitely see generational differences. Right. We also have a lot of, [00:29:00] uh, female leaders in the company. I get as the CEO, a lot of feedback about how to evolve my own behavior. Some of it, which I don't always love to hear. Cause like, uh, you know, as a Gen X or I'm like, I have a certain way of doing things, it's probably more like, I think I would came up with a culture of like grinding and work and stuff like that and then from other generations, it's more like, hey, boundaries and stuff like that. And, you know, we talk about communication norms and this, this evolution of our culture has been pretty interesting, but I do think it's, you know, as you build something, you're going to have a diverse team.

They're not always going to have the same perspective that you do and I think that we're kind of like listening to other people trying to modify your own behavior because yeah, you want to create an environment where it's diverse, there's diverse opinions, there's diversity across age, across gender, across race and opinions and perspectives and all that stuff.

Actually that makes you stronger. But. Yeah. It's not always simple and you have to hear some like difficult lessons. Sometimes the biggest thing that I've come away with in last year is it is all about the [00:30:00] team. And then it's, it's also about self awareness is huge. If people aren't self aware and can't learn, then it's going to be tough sledding for them and for the organization, the organization has to be the same way. It has to be self aware and learning. 

So I want to move on to like a discussion of financial literacy and ethics. And so look, I know this is like, you guys have very strong perspectives on this. I actually want to open up first, Patrick, with you about what are some of the best things about financial services?

And then we'll also get into what are some of the ways that it can dramatically improve. But I'm curious for your perspective, do you see having worked in this industry for decades, good things that it's contributed to society? 

Patrick Geddes: Sure. So there is a whole side of wealth investment financial advice that is very helpful in taking messy, complicated situations.

And kind of cutting through to what decisions you need to make. So there's a, I think an analogy in terms of the, the trend, what would be a healthy trend [00:31:00] for the industry is investment advice is much more like coaching or like a trainer or a nutritionist working with you than a magician sharing the secret sauce.

Because the analogy I use in the book, and I have a little video on my website, is in the wizard of Oz when the wizard is unmasked. Toto pulls the curtain back, and he's found out. And Dorothy marches over to him and says, you're a very bad man and he says, no, I'm a very good man. I'm just a bad wizard. And for me, that encapsulates the investment advice business.

When it tries to pretend it's a wizard, that's misleading and expensive. When it's very straightforward about, we can help you on a lot of things. We can help handhold. We can help the psychology. We can help structure portfolios. So you don't, you know, we can help educate you. We can help deal with these one off situations that are messy.

Like you don't know how to frame it. [00:32:00] As long as we stay away from pretending we're wizards. So I kind of mixed your good and bad there. But there's a lot of good in playing that coaching role. Um, 

Steve Chen: Paul, do you have anything to add to that? 

Paul Solli: Yeah, I mean, you know, we've got the Volcker era and interest rates got up to 20 percent or whatever it was.

And all of a sudden from that came. Checking accounts that were free with 20 percent yields and indexing. I mean, you can buy the entire US equity market for zero that places like fidelity and you can buy international and not much more. I mean, it's an amazing innovation. It's more amazing. I think than people appreciate. I mean, it's stunning. 

Steve Chen: Yeah. I mean, when I was prepping for this, I was thinking about it. I'm like, you know, I think in general I'm a capitalist, right? I think. It's working, I mean, I've obviously benefited from it, but, um, I do think it creates this great incentive structure in our country, America, you know, we especially, but like, you know, we work hard, people are innovating, productivity is going up, people's quality of life is increasing, [00:33:00] and if you look broadly across the world, poverty is declining, you know, it's gone down dramatically, and a lot of that is the innovations that we create, you know, solar panels and energy, you know, transportation, mobile devices, all this stuff, and that, It ultimately ties back to financial services and the incentives that are created there and the distribution of money and like credit and the ability to invest.

So I do think there's a lot of good things. But having said that, you know, now I'd like to get your opinions on what do you think are some of the biggest opportunities for financial services to do better? 

Paul Solli: I mean, I'll just tell you it's what you basically what you're doing, what new retirement's doing. I mean, we need to find a way to basically do the kind of coaching that Patrick described, is, you know, financial services advice should be about a coaching process. And, you know, I get your daily, or not so much daily, but your regular emails. It's amazing that it hasn't been solved yet, right? It's absolutely stunning. You know, I talked to a lot of ex [00:34:00] BGI guys that were there for the indexing revolution.

And every single one of them has said, you know, I want to be part of basically doing what you're doing, Steve, but it hasn't been done over the years. So it's, I mean, it's complicated in part, we didn't have the technology in the past. We do now, but somebody, hopefully you is going to solve this problem.

Steve Chen: How would you describe, I mean, I appreciate that. It's super humbling to hear that. I mean, when I think about good things in the industry, I think about Jack Bogle and Vanguard and like driving fees down, right? That's a single handedly changed the world in a massive way and helped all these individual investors.

I hear you like investing is only accessible to certain people versus financial literacy and education should be available to anybody. And like Patrick, when we're getting in here, we're talking about Tim Ranzett and what he's doing with next generation personal finance. But so do you think the problem, Paul, is literacy and education or behavior change like how would you characterize the problem? 

Paul Solli: Well, I mean the main problem is the financial incentives, right? I mean you don't get paid for selling broccoli in a grocery store and you know, I think [00:35:00] I saw the average financial planner United States back 20 years ago was was making something like $40,000 a year, so telling people to it's like Michael Pollan's food manifesto, you know, you want the best nutrition advice that captures a lot of it but getting paid getting people actually do it is really hard.

Patrick Geddes: I'd say, it's more behavior. Well, Educational sounds good. But whenever I hear financial education, financial literacy, I always wonder, okay, what's the spin on it? Because if it's funded by the industry, it's not going to be anything that threatens revenue. So I would argue it's more a behavioral side that, Paul mentioned broccoli, I use that analogy in my, uh, in my book that it's like chocolate cake and broccoli.

Which one do we crave? Everybody craves chocolate cake. I bake chocolate cake. It's tasty. Broccoli makes you live longer. It's boring. It's kind of bland. And so indexing is like that. So [00:36:00] you do need the education, but the challenge of the education is it's so rarely comes with demystifying this concept of beating the market that I, in fact, before I wrote the book, I think I blamed the industry more.

And then I shifted realizing advisors are valid in saying it's what people want. And what the industry is not doing enough of is telling them. That doesn't exist. Look at the track record on active. It's atrocious pre tax and it's almost, you know, it's so overwhelming after tax as we, as we mentioned, wealth management, this idea of, you know, the stock market's looking a little choppy, we'll stay out and then we'll get back in, like, just as bogus an assumption there.

The evidence is overwhelming. Everyone, individuals, professionals as an industry were pretty awful at predicting markets. And so it's telling people that magical sense of well being you're craving is natural. It's like you crave chocolate cake. It happens to be bad for you. The [00:37:00] industry is not telling you the truth.

So it's a behavioral mixed in with what you were describing as educational, but I would call the educational. It's almost more like unlearning a brainwash of, it's almost insurmountable odds. The problem is back to Paul's comment on the incentives. You hear so widely, we heard when we started the business, I still hear today, well, everybody knows you can't beat the market, but no one's going to pay us to just pick a bunch of index funds.

Yeah. And I hear that it's like, that's how it should be because picking a bunch of index funds can actually be quite valuable to a lot of investors, but they're under the illusion that it's got to be constantly tweaked and, and mucked with, and no, that's again, back to the math, your comment. The incredibly boring strategy of buy and hold rebalance, but you don't even have to rebalance all that off.

That's so anathema to, you know, we need quarterly meetings. Why [00:38:00] stock market went up. Your stock piece went up, stock market went down your stock. Like that's all a given as opposed to the, I talked to one wealth advisor, said I had a client come in and said. As soon as you lose any money for me, I'm going to fire you.

And I just thought I would never take a client like that. What, they don't understand how this works. It's all, you know, it's probabilistic and that's not an intuitive concept. It's very challenging. 

Steve Chen: So for what it's worth, I totally agree with you on incentives. I remember when I first started this company and I was thinking about the problem, financial services makes its money in a non-transparent  way.

You don't tend, it's like healthcare used to be. Healthcare has gotten better because now you actually pay more with HSAs and stuff like that, or if you pay more directly, right? Financial services has always been, well, money is made two ways. One is commissions when you're sold something that you don't really see like insurance products.

And the second way is percentage of assets, you know, or net interest income or whatever it is. It's like all behind the scenes. It's not like you don't see what you're paying. And I think that's the fundamental problem. And the other problem is, is there so much money [00:39:00] made that there's such an incentive to preserve that?

I mean, it's interesting. Like we know Rick Ferry and I know Rick, who I like a lot. And he dumps on the, uh, percentage of assets charged by wealth managers. We're going to talk about this more in a minute, but that's, that's like a symptom of what happens here that the incentives focus that industry on serving people that already have money versus people that don't yet have money.

I don't think it's necessarily bad. There is value and people for certain kinds of folks, this is back to the kind of the we're going to have decompose this whole problem. But some people like we're talking about the kind of like the DIYs versus the validators versus the delegators. Do get a huge amount of benefit from like an advisor, but some people like the DIY folks, they don't need it and they don't have to have it.

But back to the whole incentive problem. Can you guys think like an open thought process, a way to better align incentives in this whole space? I mean, Jack Vogel did it at Vanguard. He's like, Hey, I'm going to mutualize this business and then we're going to align everybody. [00:40:00] Is there a model like that that can get created that flips this a bit, aligns things better?

Paul Solli: You know, in the spirit of just sort of brainstorming this, I mean, Jack Bogle, I remember having lunch once with Jack Brennan, who was, you know, his assistant at one point, then became the CEO of Vanguard, and he told me, he actually had a number for if Vanguard hadn't been essentially a not for profit what it would have been worth and how much money Bogle and everybody else gave up as a result of the structure.

You know, so in the sense the structure keeps Vanguard honest Yeah, you know you think about open AI. I mean right now capitalism's trying to come up with these hybrid models where you've got a not for profit that owns a for profit subsidiary. They're doing that in the psychedelic space with a company called MAPS.

As Prof, you said recently in the battle between capitalism and sort of altruism, altruism got the crap kicked out of it at OpenAI. I think you need to have people who want to do the right thing [00:41:00] and either set up a structure right away that precludes bad behavior, or they just have the kind of force of character of a Jack Bogle to sort of get the flywheel going, get the momentum, like you said.

The original indexers did like places like Wells Fargo now, not BGI, but human nature is, you know, I mean, it's hard to get a person, to you're, you're almost every fee only advisor that I know that started out as not managing assets over time. Basically don't take clients unless they manage your assets.

So it's hard to say no to all that money. 

Steve Chen: 100%. And I think, like, when we think about our business, we talked about this in the preamble, but um, we go direct to consumer, or consumers just pay us directly. We go to the workplace at places like Raytheon that give planning and literacy. They just buy it as a benefit.

We also work through financial services, so we have financial advisors and firms using it. And, you know, I think from my perspective, it's like, hey, we just want to empower different business models and those business [00:42:00] models, they exist for a reason. You know, I think as literacy gets better, then people will make, maybe their choices will evolve.

And also I think new models can emerge. Like I do think AI, the power of like mass media, like this, for instance, like we have, uh, one of our affiliates is this guy, Rob Berger, right. And he's a, he was a lawyer. Then he built this kind of like blog perspective that he sold and made, you know, a few million bucks.

And then he kind of. Jumped on YouTube and now he has like 140,000 followers is just educating a bunch of people, you know This kind of one to many approach one guy and you know, he'll roll a video gets like 50,000 watches, you know, it's kind of amazing talking about complicated topics or whatever and educating people.

And so I do think the world is changing. We're, we're seeing more flat fee or fee only people that are just charging hourly some more, but not, you know, some folks just want to run their business that way. So yeah, I don't think there's any single, single answer, but hopefully things continue to go in the right direction.

[00:43:00] Patrick in your book, transparent investing. Can you just give us a couple minutes on like why you wrote it and who you wrote it for?

Patrick Geddes: Uh, sure. I, the motivation grew out of a couple sources. One was in late 2006, San Francisco magazine wrote a piece on the history of indexing called what, what the best investment advice you'll never get.

You know, which was, all this was founded in San Francisco. And then we ended up figuring about a third of the, the article. And we got over 700 calls for people looking for wealth management, which we weren't in that business. We'd done a little bit and, and had helped the guy who'd written it. So it looked as though we had, so all above board.

We just felt so bad for all those people. We ended up doing a couple of free seminars. We rented some space and just. Did a free session for like a hundred people. We did it twice. Then I took curriculum and put it on a website called transparent investing. And then I was sort of done. That was 2007. And then [00:44:00] as we started getting really successful around 2010, 2012, I made a kind of commitment to the universe of.

Wow, I've been so drowning and drenched in blessings and incredibly good fortune. It's incumbent on me to pay that back, a kind of, you know, karma balance sheet thing. And it was a dangerous thing to do to make a commitment like that. So it took me, you know, I was in arrears for about whatever, 10 years, and finally realized I got to get this thing off my chest.

And I looked at other ways of doing it. No, I got to do it as a book. It ended up being, unlike the first round, much more heavily focused on the behavioral side, which I, you know, has developed a lot as an academic area of research, and I had learned a lot more about it and realized. Wow, this is evolutionary.

Our brains are coded just the way we were coded for some unhealthy eating habits. And so the first third of the book is about your brain and like why we're, and it [00:45:00] even starts out saying, Wait a minute, why are you starting a book on investing by talking about our brains? If you don't understand that you're going to get locked into a pattern then the second part is on the industry and these incentive problems and then the third piece is the practical side with, uh, how to do it yourself if you're going to and that part is not, you know, unique.

What I've been told is that not widely available is, there's a whole chapter and it's like you can get it free on my website that explains how do I know whether I should hire someone or do it myself. And it goes through about a dozen factors of where you are, what kind of person you are, your inclination, especially focused on things like if you're the sort of person who's going to panic in a market downturn, it may seem really expensive to pay a good chunk of your assets.

For management, that's not really helping in an investment sense, but if they're keeping you from doing something stupid, that can be really [00:46:00] worthwhile. It's basically, it's in a kind of expensive therapy and that's great. And advisors will tell you, we add a lot of value doing that. I agree. And then other things I talked about, you know, the complicated situations, some tax, some initial setup.

And then I talk about all the, hh, let's call them the bogus promises of you don't want to do this yourself. You need an expert. Like, no, the experts have a terrible track record. It's like real meteorologists. We monitor how well they do. And they're really good at predicting compared to me, investment wealth, wealth managers, they're not, they have a bad track record, but they can still add a lot of value as long as you're really clear.

And then it's all about, I do a kind of scoring system. Who are you? And a lot of people need to hire someone. It's just too overwhelming, but. Do it with open eyes, do it as an informed consumer. That's the sort of point of the book, be, be a, an informed consumer the way you would in any other, or, you know, around any other topic.

Paul Solli: Can I just add to that, you know, when it comes to the investment part, you know, telling people which fund to buy or the [00:47:00] managing of the money part, you know, I want to go back to two quotes. I did an interview with Bill Sharp and asked him, you know, how often should people. Review their portfolio and he co-won the Nobel Prize with Harry Markowitz and, uh, did a lot of the pioneering work for indexing.

But he said, you know, once every five years. And he goes, well, maybe change that once every year because people will just yell at me if I say once every five years. Because he's talking about the investment piece. His partner who he won the prize with asked him, you know, what do you do for your own portfolio?

He said put 50 percent in a Vanguard index bond fund, 50 percent index stock fund. And that way I minimize future regret. So you've got two Nobel laureates, they use an index approach, they use broad diversification, they let time do the work, and they keep fees to the minimum. And, and so, I mean, one of the, again, I'll go back to one of the reasons I'm excited about what New Retirement's doing is, if you understand what Bill Sharp is saying, if you understand what Harry Markowitz is saying, if you understand where all the sophisticated money is, if you understand that 98 percent of funds underperform after tax, then the [00:48:00] stock picking piece, the fund picking piece, and I would say the market timing piece, is incredibly simple to solve.

But, how much to save, where to place the money, the behavioral stuff, I mean we used to talk a lot about the difference between dollar weighted return and time weighted return. If you take all the mutual funds out there, and look at their reported returns, and then you look at the actual returns that investors get, right?

So a fund goes up 100%, you're like, oh wow, great fund, you run in. Now it's down 50 percent the next year. You didn't get that 100 percent but that fund had an average return of 75 percent a year over the last two years. Right? So the behavioral piece is massively important. The, the getting people to save, the getting, keeping people from screwing up.

And so trying to make that process as efficient as possible because advisors have a hard time justifying getting paid for that piece. But it's the most, it's the most controllable and the most important piece. 

Steve Chen: Yeah, I agree with that. I think that's becoming more clear over time. And I do think people are like, there's an evolution and just [00:49:00] awareness and literacy that happens.

So with Vanguard, hey, fees don't have to be so high. Like, you know, the beginning of 30 years ago, you'd pay like 1 percent just on the mutual fund, right? And now you can pay 15 basis points or if you're got a lot of money, you have five basis points or whatever it is, but it's come way down, but the other fees around advice are still high.

Uh, you know, Paul, you raised, when we're warming up for this, you were sharing that Schwab did a study and it talks about, this is a big question a lot of users have, should I use an advisor? And you had this great way of framing it. It's about, you have to assess yourself. Do you have the time, the interest and the confidence?

And then depending on where you fall on that kind of like spectrum, advisors can be more or less valuable to you. 

Paul Solli: You know, rule of 72s. If you underperform by 2 percent in 36 years, you'll have half the wealth you would have had if you hadn't underperformed by 2%. The behavioral part can be 2%. So, I mean, I think advisors are incredibly important, or can be incredibly important.

And I'd even say that most people actually could benefit [00:50:00] from having an advisor. But, you gotta make sure that you know what you're paying for. Because you're not paying for beyond indexing and the Harry Markowitz 50/50 stock bond index thing, you're not paying for much. From a market timing standpoint and a security selection standpoint, you're not getting any value from your advisor other than that.

Right. But you're getting an enormous amount of advisor from a life coaching and a saving for college. And then again, the emotional part, the sad thing is a lot of the advisors oftentimes don't have better emotional regulation than the client. So you've got to make sure you've got, you know, somebody who's also not going to panic because we've seen that.

Steve Chen: Well, it's interesting. I mean, I think the other problem is even if, okay, I agree. Advice can be definitely helpful for certain people. There's just not enough advisors. I mean, there's not enough advisors to go around to help all the people that could do better. And because they're generally their business model is indexed to how much money you have, it serves their incentive to serve people that already have, you know, a million bucks or 2 million bucks.

And [00:51:00] I think there's this giant opportunity to help people that are in high school, like what Tim runs out is only like, let's get baseline literacy. And then when you first get started. You know, no, to start saving and investing and kind of keep at it for 20 years and take the appropriate amount of risk of it.

Those people don't always get, they're not always going to get personal coaching. Right. So how do you educate them at scale? I think that's one of the big unsolved, I mean, we do it through like one to many classes and workplace does it through classes and stuff like that, but still there's this like massive opportunity.

I mean, this actually gets us into the third topic here that I'm interested in talking about, which is where do you think financial services goes from here? You mentioned chat GPT and AI. Do you see any massive things that, um, Patrick, maybe Patrick would go to you for this. You're like, what could it do?

And what should it do? 

Patrick Geddes: Well, the AI is an interesting potential solution to raise because this is a bit dismissive, but you could view AI as it's in many ways, you know, chat GPT is about fill in the blank for how a human would do it. The problem is replicating that is you [00:52:00] replicate all the awful assumptions that are already baked into our brains from evolution.

Of course, I want to beat the market and chat GBT is not going to dampen that is not going to say the odds are heavily stacked against you. So we're I think we're in agreement that what should happen is this focus more excuse me on this coaching make it more like personal trainers 50 years ago that almost didn't exist as a profession and now you know it's incredibly widespread so all the different ways that can combine and you know, like a low cost call in hourly fee version.

And the thing about the hourly model is I'm quite critical of a lot of the fee incentives in the industry. But I would tell consumers it may be worth paying a lot of money in an hourly compensation to an advisor, especially if you have a fair amount of money compared to a percentage of assets so [00:53:00] where it should go is much more focused on the coaching and much more focused on hourly retainer as a model rather than the muck of the incentive problem where you have the whole industry more than glad to pander to our most self destructive instincts. 

Paul Solli: Can I, can I, I've got two sisters. They're both electrical engineers. They're both really smart. And the minute you talk about stocks, bonds, investing, they just, their eyes glaze over.

I mean, they're just stupid. When it comes to that area. And so, and there's a lot of pieces, right, that tie together that will equal financial success. Uh, in my prior firm before Aperio, we had two measures. We actually, one called the financial success ratio. And we use quick and financial planner to sort of help us with that.

And then we had something called the wealth preservation ratio. So rich people want to just keep some multiple of their wealth and then figure out how much they can give away and how much they going to give to their kids. So it was a, you know, what multiple of your wealth do you want to optimize for?

And then financial success ratio was, hey, you know, you're [00:54:00] 40 years old, you got a job, you got kids, you got college coming up, you got all these things. What do you have to do in terms of savings and asset allocation and so on and so forth. To make that ratio that might be when you're 40 at, at 36 percent and you want it to be at 100%.

Basically just says when you retire at age 65, your ratio will be 100 percent or 150, whatever. But I mean, you know, you can talk about AI, you can talk about all this stuff, but it's amazing to me that we still, I mean, that's for me, the holy grail. When you can have a system that takes people from 100 percent and wrap your arms around them and deal with the psychology, the emotions, put them in the right funds.

I mean, I don't care whether you're in an index fund at Schwab. The Schwab index fund, stock fund, or the Fidelity fund, or the Vanguard fund, you know, decide where you want to house your financial system, Schwab, Fidelity, Vanguard, then optimize around that and then have some wraparound person with the tool or the tool [00:55:00] that you can use because you're a doctor, engineer, or lawyer who thinks you can do everything yourself.

Right? But AI will be a part of that for sure. But man, um, it's amazing to me. That we haven't, you know

Steve Chen: that hasn't got solved yet. I know when I was reading and we were talking about your company back in 97, the same problems you're trying to solve. We're starting to work on solving the whole industry is working on solving.

I could see a future where there's an AI avatar. Now that stuff's starting to come real. I'm like, Oh, I should feed these AIs, like a bunch of YouTubes of myself and then, or my voice, or you can do it for anybody. And it could then talk to people individually through a voice interface, interview them, learn about them.

Understand their psychology, their appetite for risk, and then counsel them. Oh, hey Paul, you're a DIY. So, you know, and you're pretty smart and you kind of understand this. So like, here's the, your efficient path. If you're willing to put this kind of investment in and I'll remind you, like we can generally stay on track, but you know, Patrick.

Pretend you're, you're not Patrick, but like [00:56:00] Paul's sister, like, Hey, you know, you probably would really benefit from actually dealing with a human being or, you know, having a regular meeting and kind of discussing things and like giving high level guidance, but then I'll make it happen for you. You could see a future where this happens at scale.

And hopefully that, you know, we got there and, you know, a lot of the challenges that we've seen get better

Patrick Geddes: but I think the challenges around the technology and the. Artificial virtual human interface are definitely solvable. I mean, I'm not an expert in that space, but that sounds feasible. The real challenge is, what's the underlying ethics of that avatar coding?

Because the incentive to take what you just described and make it about revenue maximization is overwhelming. And you may even, let's say you, uh, NewRetirement. Is the first to market with that you do realize that all the for profit opportunities. Ah, great. People are now buying from avatars let's sell them garbage.

Yeah, and it'll [00:57:00] blow the doors off of whatever the ethical version Because it'll be even fancier and sexier and it'll be incredibly unhealthy. It'll just be another manifestation of the same incentive problem so the technology by itself can do a lot, but that's why I keep coming back to that, that you, if it's not deeply anchored on the ethics piece, it's just going to be, you know, the same thing with splitting of the atom, what results came out, some wonderful ones and some ghastly ones and AI is going to be no different.

Steve Chen: Yeah. I know. I think that there's hope though with Vanguard where you saw a big company and they brought change to the whole industry. And they say, I mean, they did create the right, you know, Jack Bogle did make this tough choice about this incentive structure change, but that also led to his success. I think if, if he had said, well, actually, no, we're going to structure ourselves as a for profit.

I don't know. Would a Vanguard have been Vanguard? Probably not. It wouldn't have been a different thing. And there is this 

Paul Solli: thing called the Vanguard effect, right? It's affected. It's holding everybody's feet to the fire. Um, but, but Vanguard like Schwab, like Fidelity, they can never be independent of themselves.

Yeah. So, to have a [00:58:00] mechanism that's separate from all these places that then can guide you at wherever you decide your financial, to house your financial system, that's, that's the holy, that's the holy grail.

Patrick Geddes: And, and to Paul's point about, you know, pick, and those are all perfectly appropriate places to house your financial life, Paul described it. The one caveat I'd always throw in is. 

Paul Solli: A Merrill Price. No, I'm kidding. Well, I'm not kidding, but Merrill Lynch. 

Patrick Geddes: All three of those, and certainly wirehouses as well, that doesn't mean all their advice is to your benefit. And you have to be extremely cautious. About the incentive and even vanguard has incentive issues around, you know, do you need our wealth advisory service or should you just buy a life cycle fund and be done with it and get it all wrapped up for extremely low fees.

So everybody's got an incentive problem and Pollock's describe it as, um, trust, but verify. If you're going to be a healthy [00:59:00] consumer, you need to bring, unfortunately, a fair amount of cynicism. Not to think that everyone's out to rip you off, but if you think the financial services is looking out for you first and itself second, you're an extraordinarily naive human being.

Steve Chen: Yeah, it's tough. I do think that things are. Things are going, they're heading the right direction. It is going to get better. It is slowly getting better. We'll hold you to that. It does take decades. It takes decades. Yeah. Financial services moves, not always so quickly, but maybe we'll see a dramatic change with some of the stuff that's coming with AI when you guys are out in the world, I mean, do you see any companies that you think are really doing great stuff out there? In the personal finance space or in the AI space? 

Paul Solli: Well, I mean, back to Vanguard, right? I mean, they did the indexing and then they introduced the lowest cost. And I think maybe at the time, maybe it's still the best constructed target retirement funds. They were second to market after third to market after, I mean, the original indexers, BGI or Wells Fargo came first to market with that.

But, uh, you know, those funds have captured a [01:00:00] ton of assets. And I think the big solution now, I mean, they tend to stop at retirement. Yeah, I mean, one of the problems is annuities are fantastic, right, in that, you know, you're getting something and somebody else is managing the assets for you, so you're not going to be, your emotions aren't going to move you in the wrong direction.

Unfortunately, it requires signing everything over to a company that you don't know what's going to happen with them, right? But in a sense, what we need is we need, and I think software can do this. I think the stuff you're doing can do this. You need an annuity style solution for people. That doesn't require them to hand over the keys to, you know, Mass Mutual or any other, other firm.

And all the hand holding that goes in with that, the financial planning, the hand, but when, when target retirement funds were made an option and became sort of the default for people who didn't pick an option, the 401k, I mean, the, the assets exploded. But what it told us is people want somebody to do it for them.

Steve Chen: I do think that when you look [01:01:00] across this, it's like, okay, we want to solve for education. We want to solve for behavior, want to solve for fees, appropriate fees, right? Want to solve for tax efficiency and you want to solve for mutualization of risk. Cause there's all these areas. Those are all huge levers that people can take advantage of, but like they're all handled by different silos of the economic world.

There's nothing that's built in a totally integrated package and you want to solve for a time, like a full life cycle finance. Ideally, I mean, in some ways I think about social security is actually not terrible. I mean, it's like you'd save their money as reserved. You're not, it's not really invested effectively per se, but there's this mutualized risk, you know, mutualized pension essentially for folks that's out there. So, and I know people that have pensions, they really love it, but the companies were like, I don't want to be in that business. Maybe there should be a company that creates like a synthetic pension at a societal level that's like, you know, that could be a big idea.

Paul Solli: I mean, I'm a, I'm a left leaning capitalist, but I think for other than the ultra rich. Which is another sort of tragedy. The mutualization of assets in a [01:02:00] way that follows people around, it pays people who live longer and subsidizes with the ones that live shorter

Patrick Geddes: One advantage of what you're trying to do, Steve, though, is the really wealthy, they get extremely good financial advice.

They get their eyeballs gouged out a lot like retail and you're absolutely right about it's very hard if you have you know 200,000 and not you don't know what to do. That is a real challenge and it's great. You know the work you're trying to do on that score, but this myth that the very wealthy are savvy about money.

They have some great advisors and they have some really not so ethical ones. And it's fascinating to watch that again, it's a behavioral issue, especially if you're an entrepreneur and you made a hundred million dollars founding a company and then selling it to say a tech company, this sort of Midas touch assumption. Well. I need to go and do that in the investment space, like, um, different world. 

Paul Solli: Well, you know, it's sort of like that hypothetical 2 percent [01:03:00] drag means half the wealth in 36 years. Look, if somebody's got 20 million bucks and they pay that extra 2%, which they probably are. In terms of taxes, bad, you know, just generally bad advice and execution.

Okay, so they'll have half as much as they would have otherwise. It's the poor bugger with 500,000 bucks that we care about. Right. 

Steve Chen: Well, I think I'm optimistic and like we're doing a bunch of work. I think actually a great way to solve this is through the workplace. Getting that way better. Like there's good financial, there's some emerging financial wellness stuff, but it's mostly still kind of just literacy only.

The work we're doing at Raytheon, it's like, Hey, you can get literacy plus planning. And I think that they're also, you know, plus classes. I think they're also interested in this idea of coaching. That would be a scaled workplace benefit. The people actually question is, can you get them to use it? Right.

Then there's individuals. Will they actually use this? But there's some positive things happening there. Any last things that you would say to our audience, so our audiences. Mass affluent folks, many of them approaching retirement, they've worked and saved their whole [01:04:00] lives. They've, you know, they've built up a couple million bucks, usually 500,000 to a couple million dollars.

They're trying to make good decisions. And they know they might have to live for 20 or 30 years or more on this money. Any insights that you would share with them? 

Patrick Geddes: I think the adage of investing is simple in that people make it overcomplicated, but it's not easy because of the psychology and the mess of our financial lives tend to be messy and all over the place.

So I guess one bit of advice would be try and think holistically about your entire net worth. And try and think probabilistically, if that's an adverb, that outcomes are uncertain, and that's a hard thing to get through, but I guess those are the two. It's advice. I don't know.

Paul Solli: Well, you just, I mean, it sounds like they're doing the right thing and they should be telling their friends and family and doing more of that.

I mean, we need a revolution in, in a sense, wealth [01:05:00] management for the people who aren't super wealthy in the same way we had, have had a revolution in, in indexing in the delivery of equity markets and fixed income markets. I mean, that, that's sort of been solved. I mean, money management for the consumer has sort of been solved.

You get global diversification for free, basically. That's solved. It's this other thing that's not been solved. 

Patrick Geddes: And one of the other myths, just to throw a final piece on it, is the assumption you have to be really smart and on top of markets. And I have met some very, very smart people who are incredibly stupid when it comes to investing.

And I've met the opposite. I've met some people. Who will not impress you as being all that savvy and sophisticated. And you ask what they do and they're investing and they say, yeah, I'm a all sort of indexed and very low fee. And by the way, I've never sold. Even in the worst downturn and I'm fascinated like wow, you didn't seem like all that bright necessarily but you have some really good behaviors and [01:06:00] you're your behavior is so much more important than your analysis and that is one of the other bits of advice I'd give is it's your you're, you know, Paul has used the term good hygiene, good investing hygiene that actually can benefit you enormously.

And it doesn't have to be complicated. In fact. In many cases, it shouldn't be complicated. Keep it really simple and look at it infrequently. And that's a great path to financial success. Along with, uh, I wrote a blog post on this called, uh, about humility. How humility is usually associated in an economic sense with poverty.

Like, you know, the Buddhist monks or the Little Sisters of Mercy. But humility in investing, back to Paul's, you know, doubling your indexing is all about humility. I don't know. I don't know where the market's going. And I don't know how to pick the stocks. Oh, you're not a very sophisticated investor. No, actually, you're an incredibly sophisticated investor and humility can make you a lot wealthier.

And that's a [01:07:00] fascinating sort of paradox. 

Steve Chen: Right. There are people in the world that know these things, like the Bogleheads communities and, you know, folks like yourself. And then it's getting that word out to folks. And then it's also changing like the defaults. Like it was funny, like earlier in my career.

When I first had a job and got a 401k, I think the defaults were probably like a lot of cash or super low risk or whatever it was, you know, and then there are high fee things and all that stuff. And now they finally said, okay, look, we're going to default people into saving first. And then also escalation, like the saving rate will increase and the risk level that you take will be appropriate.

Those defaults will change the lives of the folks that joined at the right point in time. In some ways, this is also generational as a Gen X or previous generations had pensions. And that was like that actually, those are good as a Gen X or with like early 401k when they were crappy, less good, some people did make good decisions and they've, they're, you know, they have way better outcomes.

It actually took me like 50 podcasts with people like you to like drink Kool Aid, start doing it right, which I am finally doing now. But, [01:08:00] uh, and now I think the current generations, if they take advantage of it, they can do way better if they're in the better defaults. 

Paul Solli: I was in that 401k advisory business for a long time and the sad thing was you can be trapped inside of a 401k plan inside your company and it's so poorly designed that you can do everything right and then you get completely utterly screwed in the execution because the HR person is either too lazy, too ignorant.

Or there's actually some benefits that the company gets through not having to pay for record keeping or whatever. And I don't know how much more of that is out there versus when I was advising firms. But, um, that's the sad thing. You can get somebody who saves really well, is just doing everything. And you used to talk about the white hats, the gray hats, and the black hats.

If you're in a place like, well, Ameriprise or Merrill Lynch, you've got to be more Careful about, you know, the whole structure is, is such that they're going to take more of their pound of flesh than Vanguard is. So I like to sort of say that I remember my daughter went on a trip with a group of kids [01:09:00] to Costa Rica and it was really well taken care of, but a bunch of the girls snuck out the window one night in San Jose, Costa Rica to go out and party all night.

These are high school kids. And I just thought, well, better that they did it, I guess, in Costa Rica than somewhere in El Salvador. In Geneva, if you're at Vanguard, there's not a lot of ways you're going to get screwed. Yeah. If you're at Merrill Lynch, there's a lot more ways you're going to get screwed. So understand the environment, the neighborhood you're in.

Steve Chen: Yeah. For sure. That's a great point. And I, I think over time, hopefully, you know, there's more, let's shine on the stuff. Okay. Well, this was super good. So I'm going to wrap it up. Patrick and Paul, appreciate your time. Thank you. Appreciate hearing your story about Aperio and your perspective on how the market has evolved.

It is. It's pretty interesting to hear the stories and just the people you've met over time. Like I just quick shout out, I know Patrick, you mentioned Christine Benz, you know, and I think, you know, Rick Ferri, like Jack Brennan, they've all been on the podcast, Allan Roth on the podcast. So we'll give a shout out to all these folks.

[01:10:00] Um, Jonathan Clements, I don't even know him, but yeah, so there's a little group of people here for our listeners. Thank you for tuning in. You know, we hope this discussion has shed some light on the world of finance for you and inspired you to think more about your own money. And be thoughtful about who you're associating with.

We will put a link to Patrick's book transparent investing here and he's offered that anyone who inquires about the link can get a free electronic copy. So hopefully you can take advantage of that and then if you hit this far any sharing of this podcast or our site any reviews are totally welcome. It really helps us.

We're also if you want us to our platform will be available in your company or through a financial advisor you work with. All intros to us are totally welcome. And with that, thank you very much. We'll see you next time. Appreciate you taking the time to listen to this.