Are you looking for another book that condemns the investment industry for excessive fees? How about one that “proves” professional investment managers cannot provide returns better than the market itself and, therefore, investors should own only passive index funds?

Or one that decries the quality of advice from planners and investment advisors who act only in their personal financial interest? And, finally, how about one that suggests the entire investment industry is involved in a plot to swindle an entire population of naïve, gullible, brainless individuals who have “drunk the industry’s Kool-Aid” and, as a result, have not only been deceived but have also paid billions of dollars for the privilege?

Wrap all these up into one book and you have The Big Investment Lie: What your financial advisor doesn’t want you to know by Michael Edesess.

Before you dismiss the book outright, you need to know that Edesess is a highly respected economist who has worked in the industry in senior capacities. He has a doctorate in advanced mathematics with a specialty in their application to investments, including performance and risk measurement. Edesess employs his training in an analysis of investment returns in the U.S. over extended periods. His hypothesis asserts, among other conclusions, that investment advisors and investment managers cannot predict market movements any better than a relatively unsophisticated New York cab driver, so why would anyone pay them vast amounts in fees to attempt to do so?

In support, he draws on the work of Nobel Prize winners, including many whose names are synonymous with investment theory (Bill Sharpe, Myron Scholes, Harry Markowitz, etc.), as well as other academics. He then peppers that with personal experiences (mostly bad) and anecdotal stories (some amusingly sad) to flesh out his case.

Fair enough — and anyone interested in the research will find it thought-provoking.

But that isn’t enough, according to Edesess. His major rant is directed at the industry at large and the people in it who have conceived and perpetrated a huge falsehood -— “the big investment lie” — on an unsuspecting public. This deceit has no boundaries; in fact, Edesess argues, the tallness of the tale is the reason it thrives — by feeding on itself and engulfing every facet of the financial services industry.

The result is a fraud of unimaginable proportions to which even the most sophisticated investor falls prey. For example, explaining why high net-worth people participate in “the lie,” Edesess writes: “People are vain, especially many wealthy people. Appearing to be a high-roller can be more important than actually making money.”

He continues: “Besides that, people like the Big Investment Lie. They want to believe it. They collude in it themselves. They hire advisors who help them believe it. They want to get rich quick or if they are already rich, they want to get fabulously rich and they’ll pay through the nose to someone who supports the belief they can do it.”

Edesess divides his critique into three parts: his exposé of the enormous and unjust fees built into the manufacture and distribution of financial products, the fallacy of added value by investment managers and advisors, and the manipulative ways in which the industry gets people to believe the hype. His harshest condemnation is directed at hedge funds and other “market-beating” promises.

In the final chapter, Edesess tells “all you need to know to be a smart investor” with his “Ten New Commandments”:

1.  Don’t gamble.

2.  Stop trying to beat the market.

3.  Stop believing in past performance.

4.  Ignore claims of investment managers and advisors.

5.  Pay only minimum fees.

6. Don’t pay anyone to pick stocks.

7.  Avoid hedge funds like the plague.

8.  Know your risk level.

9.  Keep fees and taxes as low as possible.

10.  Invest only in low-cost index funds.

Books such as this serve a purpose: they raise issues present in the industry; they offer a different perspective; they demonstrate sensitivity to some aspects of the way business is done. As such, we should be willing to evaluate them with objectivity. We may not agree with much of what Edesess has written, but we should respect his research and passion. Anyone in the industry will benefit from reading The Big Investment Lie. IE