There are many variants of "eat your own cooking" and many rationales given for it. The suggestion
appeared in a paragraph beginning: "Stopping the bleeding is a more difficult question. Have your investors lost faith in you? "
Barn doors and horses come to mind in this context. Having employees invest exclusively in funds offered by their employer may help sustain investors' faith, but I don't see it restoring faith that has been lost, or stanching the outflows.
More broadly is the question of whether the purpose of restricting employees from investing outside is to prevent potential conflicts or to eliminate the appearance of conflicts. If one is talking about investors' faith, it seems that it is more the latter.
To illustrate the difference: a lawyer must withdraw from a case if there is an
actual conflict of interest. In contrast, a judge should recuse himself if there even the
perception of bias.
It's not difficult to put rules in place that would prevent actual conflicts.
@hank has given examples where a safe exception might be made for outside investing (employees in narrowly focused, boutique firms). That addresses actual conflicts, but not necessarily the appearance of conflicts, certainly not to the same degree. If it is investors' faith that is the issue (and should it be?) then is this sufficient?
Then there is the reverse consideration - not that other interests would pull a manager in different directions, but rather that having a lot of money invested in the fund being managed would motivate the manager to do a better job, to boost performance. That seems to be
@rforno 's focus.
While this is not entirely without merit, it's something I've long been skeptical of. First, because I have difficulty believing that greater money will spur multi-million dollar earners on. (Will a CEO work better for $20M than for $10M? What about the Protestant work ethic, and what about pride in one's work, regardless of income?) Second, from a personal investing perspective, putting one's eggs in a single basket (more generally, investing in an employer's stock) is not a good idea. Third, you may not get the behavior you want - a manager may not want his own money at risk, so he might manager the fund holding his money too conservatively. Or the manager might increase the risk excessively (since, on average, risk is rewarded, though it often doesn't work out that way).
I keep thinking about managers who run a company's target date funds. Should they be expected to put money into all the target dates, even though by design only one of the funds is suitable for them?
