"Do As I Say, Not As I Do" Doesn't Work

"Do as I say, not as I do."  We've all heard the expression.  We usually hear it when someone who is supposed to know better is doing something that they don't what us to do.  Parents are especially guilty of saying it.  Politicians may not actually verbalize it, but might be the worst offenders.  The same rings true for many investment advisors and mutual fund managers.  And that could cost you money. 

To start, let's address the mutual fund managers.  Until recently, there was no way to know if your fund manager had any of their own "skin in the game."  But new regulations that have been put in place in the wake of the fund industry's market-timing scandals make it easier to find out if your fund manager is investing in their own fund.  And, the data shows that there is a strong correlation between manager ownership and fund performance.  If a manager invests in their own fund, performance is better.   

It makes sense.  If a manager has their own money at stake, they have a different perspective.  It's the same reason that people treat a car they own differently than a rental.  So, the lesson for investors is that you should look for funds that are managed by someone willing to invest their own money.  It seems to give you a significant edge. 

Now let's talk about investment advisors.  Does your broker, or advisor, invest the same way that they advise you to invest?  Do they have skin in the game?  When your advisor suggests an investment, have you asked them if they invest in the same vehicle?  Don’t you think you have a right to know?   

Granted, there will be, and should be, some differences.  Your advisor may be in a different stage of life than you…which would call for a different portfolio mix.  You will have different goals, time horizons, cash flow needs and risk tolerances.  But all of these can be addressed through differences in allocation. 

But what about the underlying investments…the nuts and bolts of the portfolio?  Do they invest in the same funds they are suggesting for you?  If they are recommending an annuity, do they own one?     

There is no data available that would allow us to determine whether investor performance can be linked to whether an advisor "eats their own cooking."  And, unlike the new disclosure rules in the mutual fund industry, there are none at the advisor level.  So you have to ask. It's YOUR money!  You should know. 

At my advisory firm, we invest our personal funds using the same vehicles that we recommend for our clients.  We want our clients to know that we believe the investment strategy we follow, and the investment vehicles we use to accomplish that strategy, are the best for both of us.  It just seems right.