The World's Most Honest Money Manager Tells All

Brace yourself, folks: A money manager is about to speak the awful truth.

Of course, mutual fund managers aren't a dishonest lot in general -- most seem like fairly straightforward, conscientious people. But you won't find many skippers who readily concede that the industry is riddled with problems that make index funds look most appealing.

Ted Aronson of Philadelphia-based asset manager Aronson+Johnson+Ortiz is one such rare bird -- but his frankness isn't the only trait that makes him unique among money managers. Aronson's firm also refuses to engage in "soft-dollar" deals with brokers that surreptitiously eat into investors' returns. In fact, he chaired a recent Association for Investment Management and Research commission that established "best execution" practices, or trade management guidelines, among fund firms. Further, Aronson's firm keeps fees low -- and pegs much of the fees that his firm collects to actual performance.

Last, as a manager for institutional clients such as General MotorsGM and the New York Fire Department Pension Fund, as well as fund investors via his QUSVXQuaker Small-Cap Value fund, he has managed to outperform fairly consistently -- rare indeed.

In this week's 10 Questions, Aronson weighs in on a host of topics -- and as you'll see, he is big on full disclosure.

1. Why would you, a successful manager of actively managed money, tout the virtues of passively managed index funds?

There are three reasons why index funds make a lot of sense. First, this is a competitive ball game. The past three years -- I guess you could call it a melt-up, then meltdown -- have humbled everyone. It's a very competitive game and most don't measure up to the performance of the indexes.

Second, investors need to understand that what Wall Street is expert at is separating clients from their money. When the pie goes around, there are more fingers in it than the owners have any idea -- so expenses are amazingly substantial.