Active Investing Is ‘Biggest Scam on the Planet,’ Says Nuclear Pharmacist Turned RIA

In his first career, Mark Hebner was a nuclear pharmacist, the co-founder and CEO of a radiopharmaceuticals company. For his second and present career, he chose registered investment advisor specializing in online investing with index funds.

Those two professions have zero in common — but not when it comes to career strategy: With both, the marketing-minded Hebner pioneered a brand-new, uncharted field.

Indeed, the founder and president of Index Fund Advisors, launched in 1999, is smart about capitalizing on what he spots as outsize opportunities.

To wit, the nuclear pharmacy career panned out so well he retired at 32 with $6 million only 10 years after co-founding the company, as he tells ThinkAdvisor in an interview.

Hebner, who credits himself with the idea of robo-advisor, invests clients’ assets exclusively in index funds, using an approach based on indexing models designed by celebrated finance professors Eugene Fama and Kenneth French.

IFA’s portfolios comprise funds sponsored chiefly by Dimensional Fund Advisors, as well as Vanguard, Fidelity and BlackRock.

Managing assets of $4.7 billion, the firm has about 2,300 high-net-worth clients and a substantial business in 401(k) and 403(b) plans.

In the interview, Hebner sharply dismisses active investing as “the biggest scam on the planet” and labels active managers “lucky coin flippers.”

In fact, he’s gone so far as to write a book, “Index Funds: The 12-Step Recovery Program for Active Investors” (Rev. 2012). In the interview, he tells why they should make that climb to “Tradeless Nirvana,” as he puts it.

Hebner also discusses what motivated him to leave retirement after some 13 years to enter the financial services industry.

In Career No. 1, he and his partner built their nuclear medicine business founded right out of college — to diagnose and treat diseases — into a publicly traded company. Later, Syncor International was acquired by Cardinal Health for about $850 million.

Today, Hebner markets online to drive potential clients to his firm’s website, where they find available 193 educational videos, 175 articles and 92 charts touting indexing.

A financial markets history buff, he has a personal collection of 2,576 books on the subject. One tome dates to 1648; another, “The Great Mirror Folly,” written in 1720, is about the first financial crisis and worth $10,000, he says.

ThinkAdvisor recently held a phone interview with Hebner, who was speaking from Irvine, Calif., where his firm is based. The indexing authority stated proudly: “I was never a stockbroker. I was never an active manger. I started this [business] the right way from the beginning.”

Here are highlights of our interview:

THINKADVISOR: You frame your book, “Index Funds: The 12-Step Program for Active Investors,” as “the treatment choice for wayward investors.” Why did you make that the theme?

MARK HEBNER: The stock market is a gambling casino unlike any other in the world; it’s like going to the race track and betting. I saw research saying that investing was an endorphin-generating activity, and that led me to the New Jersey Alcoholics Anonymous website with its section on stock market gambling. I thought, “Perfect, I’ll come up with my own version of the 12 Steps.”

So, then, are investment advisors enablers?

They’re addicted themselves. The enablers are the clients who put up money so they can continue to gamble. They’re funding these people’s addictions.

What’s your take on active managers’ performance?

Active investing is literally the biggest scam on the planet. People pay other people to gamble with their money in the market and try to beat a risk-appropriate benchmark. You don’t see consistent outperformance. You see random patterns, much like people flipping coins. What you basically see are lucky coin flippers.

Before you went into the financial services industry, you were a nuclear pharmacist. That seems to be at the opposite end of the spectrum! What prompted you to work in the field of radiopharmaceuticals?

I had a choice to go into a nice profession because my father passed away when I was 3 and left me a college fund. I considered doctor and lawyer, but I wasn’t a great student. The third profession my mother and stepdad suggested was pharmacist. I said, “OK, I’ll try that.” But when I interned as a pharmacist, counting [pills] by five in a drug store, I looked around and thought, “Oh, my God, this is horrible. Who wants to do this for a living!”

What was your next move?

In an orientation class, a guy talked about specialties within pharmacy and how radiopharmaceuticals was brand-new and that no one was doing it. I thought, “Now that sounds exciting!”

How were you able to start your own company right off the bat?

It was pure luck. I had become a student teacher for the other students, and a very wealthy Chinese student came along and picked me to be his partner in a company for which his father put up all the money. He gave me one-third of the company. That turned into $6 million for me 10 years later when I retired at 32.

Why did you choose financial services as a second career?

After I retired, I invested my money with a major brokerage firm and was always unsure of what they were doing. A friend was killed in a car wreck about 13 years after I retired, and his widow asked me to help her with her portfolio. I didn’t know anything about investing, but I took the opportunity to learn so that I could help. When I was reading up about investing in 1998, I discovered there was probably an opportunity to set up an advisory firm that specialized in passive investing since nobody else was doing it.

What path did you take?

I was an angel investor investing in a lot of web startups. So I decided to leverage what I’d learned to create a web-based investment advisory business. I proceeded to [be one of the early developers of] the robo-advisor idea, along with an advisor who helped open accounts.

What was your strong suit going into that?

I was basically a marketing person. That was my bent in my previous career with my nuclear pharmacy company, where I was the CEO.

Did that strength play a role when you formed your new firm?

Yes. I discovered [the existence of] Dimensional Fund Advisors and realized they had a very unique model but no marketing and that nobody was telling their story — certainly not on the internet.

How did you apply that?

I decided to build a business [focused] on passive investing and pretty much utilizing the Eugene Fama and Kenneth French research, which is incorporated into all the Dimensional products — their own unique indexes. I thought it was an interesting business opportunity to make these available through an online advisory.

What’s the chief thing clients and prospects should know about active investing?

They need to be educated that trading will reduce their expected return, not improve it. They need to understand that small companies are expected to have higher returns than large ones and value stocks are expected to have higher returns than growth stocks.

And so?

Even though small-caps are supposed to do better than large-caps, in 10-year periods there’s still about a 25% chance that you won’t see outperformance of small over large. That seems like a long time for people to hold onto something they expect, even though they didn’t get it.

What’s the future of indexing?

That you can’t expect to get the return you expect even in 10-year periods. Most people can’t handle that mentally.