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The Final Word: The Near Occasions of Sin

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“You tell me how people get paid, and I’ll tell you how people will behave.” The speaker was Bob Reynolds, who has reinvented Putnam Investments over the past two years, and he was referring to his new comp plan for Putnam money managers. At the Morningstar Investment Conference in June, Reynolds said that plan rewards with bonuses those managers whose funds perform in the top quartile over a rolling three-year period. Why? Because “what clients are looking for is top-quartile performance.”

Reynolds could just as easily have been talking about independent investment advisors–how you get paid affects how you behave. Your clients must clearly understand the total amount they’re paying, and what they are getting in return for that payment. That’s why disclosure is the right thing to do for clients. It will also help you differentiate yourself if you go beyond what the law or the regulators require when it comes to client disclosure.

On July 12, advisor Mike Patton addressed the issue from a different perspective. “What’s the difference between a commission-based advisor and a fee-only advisor?” he blogged on July 12 at, “One is selling an investment product while the other is providing advice. When the option of receiving four to five years worth of commissions up front is present, it’s a tremendous temptation.”

Every good advisor not only considers the risk in an investment and how that investment compares to its peers, but also the overall cost of said investment. One of the most interesting recent research threads has been Morningstar’s ongoing exploration of actual investor returns versus total returns. In a June 10 piece by Karen Dolan at, she wrote that “Across the board, investor returns are lower than total returns.” Moreover, “the data don’t provide evidence that advisors and institutions do an excellent job timing their moves while other channels are rife with fickle investors. In aggregate, they’re all losing money to poor timing.”

The truth is that advisors must be aware of their own biases when it comes to clients and investing clients’ money. It’s also wise, I would argue, that advisors should avoid the near occasions of sin–as Mike Patton suggests in avoiding vehicles that pay you more but pay out less to the client. Advisors should take their own medicine.

That’s what I’ve decided to do as well. After writing a column in the front of the magazine since January 2001, I’m now in the back. Counterintuitively, that’s progress: I’m taking Mark Tibergien’s advice and am making myself a dispensable leader. The new editor of Investment Advisor, my esteemed, entirely competent colleague John Sullivan, will be writing in the front of the book and putting his stamp on the magazine.

In this space I won’t be telling you what’s in the magazine this month, but rather what’s not in the magazine. I’ll be sharing the insights of thoughtful and successful industry luminaries as I did in the top of this column, along with the pearls I get from advisors like Mike Patton. After all, you are my real bosses.

I plan on sharing any intelligence I have with you for a long time to come, and I welcome your guidance in doing so.


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