Stewardship Over Salesmanship in Investment Design

Don Phillips, Morningstar’s founding fund analyst, has spent four decades observing the tectonic shifts in investing culture--from the deification of fund managers to the rise of indexing and the latest push into private assets. His insights reveal a consistent pattern: the most durable outcomes emerge not from chasing what’s easy to sell, but from aligning with what’s good to own over time. The hidden consequence of much industry innovation is the misalignment between investor horizons and product design, where short-term sales incentives erode long-term stewardship. This post maps those systemic tensions, showing how well-intentioned decisions--like embracing private credit or thematic funds--can create downstream risks investors aren’t prepared for. It’s essential reading for advisors, allocators, and investors who want to see past the noise of the moment and understand how structural incentives shape real-world outcomes. The advantage lies in recognizing where the industry is optimizing for assets under management rather than investor success--and choosing a different path.

Why the Obvious Fix--More Choices--Creates Worse Outcomes

The investment industry loves novelty. A new product launch, a fresh strategy, a trending theme--these are celebrated as progress. But Don Phillips sees a different pattern: the proliferation of choices often amplifies risk without improving outcomes. The real story isn’t about what’s being offered, but why it’s being offered. Is it because it’s good for investors, or because it’s easy to sell?

This distinction--salesmanship versus stewardship--is the central system dynamic Phillips returns to again and again. When a firm launches a product because it’s “hot,” because clients are asking for it, because competitors are doing it, they’re operating in salesmanship mode. The immediate payoff is clear: assets flow in, revenue rises, bonuses get paid. But the downstream effect? A misalignment between the investor’s long-term horizon and the manager’s short-term incentives.

"Are we going to be a part of accelerating the fear and greed cycle or are we going to be a part of moderating it?"

-- Don Phillips

This question cuts to the core. Most investors are saving for decades. They’re thinking about retirement, security, legacy. But the product being sold to them is often optimized for the next quarter’s sales report. Thematic funds, crypto offerings, private equity access--these aren’t designed with the retiree in mind. They’re designed with the sales team’s targets in mind.

And the system responds. Investors buy high when excitement peaks, then sell low when reality sets in. The product may have a solid paper return, but the investor’s actual return--the dollar-weighted outcome--is negative. Morningstar’s research on investor returns versus fund returns proves this again and again. The gap isn’t noise. It’s a structural flaw in how products are conceived and distributed.

The irony? The very tools meant to diversify portfolios--private equity, thematic funds--often do the opposite. Phillips points out that private equity today is overwhelmingly concentrated in tech and AI. So is the public market, thanks to the dominance of the “Magnificent Seven.” Moving from an S&P 500 index fund into a private equity fund doesn’t diversify risk--it concentrates it, just in a less liquid, less transparent wrapper.

This creates a new layer of risk: liquidity mismatch. Investors trained on daily liquidity in mutual funds and ETFs are now being asked to lock up capital for years. When Blue Owl’s private credit fund hit gates, retail investors were shocked. But the shock wasn’t about the gate--it was about the broken promise. They’d been sold something that felt like a money market fund, but behaved like a high-risk, illiquid asset. The industry played up safety; it downplayed risk.

The system adapts, but slowly. Retail investors, burned once, become wary. Trust erodes. And because trust takes decades to build and minutes to lose--Warren Buffett’s old maxim--the entire ecosystem suffers. Not just the fund company, but the advisors who recommended it, the platforms that listed it, the data providers who rated it.

The 18-Month Payoff Nobody Wants to Wait For: Stewardship as a Moat

There’s a reason American Funds stands out in Phillips’ analysis. They don’t tie manager pay to assets under management. They don’t offer sector funds. They’ve avoided the gimmicks that drive short-term flows. And yet, over decades, they’ve built something durable. Not because they optimized for headlines, but because they optimized for outcomes.

This is stewardship in action. It’s not flashy. It doesn’t trend on Twitter. It doesn’t generate press releases. But it compounds.

The key insight? Stewardship creates a feedback loop that salesmanship breaks. When managers aren’t pressured to outperform a benchmark in Q4, they don’t take reckless risks in November. When they’re not chasing assets, they don’t dilute their strategy. When they’re not paid in basis points, they don’t grow the fund beyond its capacity.

Compare that to the fund company that tied manager compensation to top-decile annual performance. The incentive was clear: gun the portfolio in the final months, take wild risks, and hope it pays off. If it did, the bonus was huge. If it didn’t, no big deal--next year was a clean slate.

"We realized we created this incentive that was basically encouraging managers to scar their long-term performance records."

-- Don Phillips (paraphrased from transcript)

This is a classic second-order negative. The immediate effect--managers trying harder--sounds positive. The downstream effect--increased tail risk, performance chasing, blowups--is catastrophic for investors. But the firm still wins in the short term: assets grow, fees rise, leadership looks good.

Stewardship doesn’t work that way. It’s a long game. It requires patience most firms lack. It means turning down assets. It means saying no to trends. It means designing products that don’t sell easily, but perform reliably.

And that’s the moat. Not scale, not distribution, not marketing spend--but alignment. When the manager’s success is tied to the investor’s success over decades, not quarters, you get better behavior. You get discipline. You get sustainability.

This is why indexing succeeded. It removed the misalignment. No manager ego. No performance chasing. No hidden risks. Just a simple promise: you get the market, minus a tiny fee. The result? Better outcomes for most people.

But indexing also removed something valuable: the deep understanding of how businesses work. Phillips compares this to learning a language. Yes, Google Translate gets you the gist. But to truly understand a culture, you need immersion. The same is true of investing.

"If you think of investing as understanding businesses what makes them tick you can learn so much it can be an incredibly rewarding experience."

-- Don Phillips

The risk of full autopilot? A generation of investors who don’t know how to think about value, risk, or trade-offs. They’ve outsourced not just the portfolio, but the mindset. And when the next crisis hits--when markets stop going up--will they stay the course? Or will they panic, because they never learned the story behind the numbers?

How the System Routes Around Your Solution

The industry keeps trying to solve the same problem: how to get investors to behave better. But the solutions often make it worse.

Take target date funds. Designed to simplify investing, they’ve done wonders in reducing fear-and-greed timing. But they’ve also created a new dependency: investors now assume someone else is managing the risk. They don’t ask what’s inside. They don’t question the glide path. They just trust.

And when those funds hold concentrated bets--whether in public tech or private equity--the risk is hidden in plain sight. The system didn’t fix investor behavior. It bypassed it.

The same is true with AI. Phillips sees AI as a tool that can either deepen thinking or drown it in noise. Used well, it can help investors ask better questions, challenge assumptions, and refine judgment. Used poorly, it becomes another source of overreaction--another screen to stare at, another signal to chase.

The real danger isn’t AI replacing analysts. It’s AI amplifying the worst instincts: the urge to do something, to react, to optimize for the moment.

Jack Bogle’s old line--“Don’t just do something, sit there”--has never been more relevant. The best portfolio move is often no move at all. But that doesn’t generate fees. It doesn’t justify a 1% AUM charge. And so the system incentivizes activity, not outcomes.

Which brings us to annuities. Phillips calls them “boring tools that solve problems.” They provide income. They reduce uncertainty. They align with the end goal of investing: security, not just wealth. But they don’t sell well. They’re complex. They’re not sexy. And so they’re underused.

The system routes around them. Advisors stick with what’s familiar. Investors stick with what feels good. And the industry keeps launching new products that look innovative but deliver the same old outcomes: high fees, poor timing, and broken trust.

Key Action Items

• Over the next quarter: Audit your fund lineup for “salesmanship” signals--thematic names, recent launches, assets surging due to trends. Ask: Is this easy to sell, or good to own?
• Within 6 months: Shift at least one client conversation from “What’s hot?” to “What’s aligned?” Focus on stewardship criteria: manager incentives, strategy capacity, long-term fit.
• This pays off in 12--18 months: Build a simple stewardship scorecard for fund evaluation--factors like compensation alignment, portfolio transparency, and liquidity design. Use it to filter out noise.
• Start now, discomfort required: Have the annuity conversation with one client who’s approaching retirement. It’s awkward. It’s necessary. It’s where real value lives.
• Ongoing: Use AI as a question-generator, not an answer-machine. Prompt it with “What are the risks I’m not seeing?” or “How could this blow up in 5 years?” to force second-order thinking.
• Over time: Prioritize tax efficiency and decumulation planning over accumulation tweaks. The biggest gains aren’t in finding a 0.5% better manager--they’re in keeping more of what you have.
• Long-term (3+ years): Invest in understanding businesses, not just markets. Read a company’s annual report. Follow a dollar through its operations. That depth won’t show up in quarterly returns--but it will show up when it matters.