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August 01, 2010 at 08:00 PM
“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 InvestmentAdvisor.com, “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 Morningstar.com, 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.”
