You see, as a portfolio manager garners more investment success, more clients will flock to him. As more clients flock to him, his assets under management grow. As the assets managed by a successful portfolio manager grow, he earns more revenues (whether those revenues come from an asset-based fee or a flat fee). That is a good thing for the portfolio manager.

And, to the extent the portfolio manager can maintain his superlative performance, that's good for the clients, too.

But there comes a point in a portfolio manager's asset growth where that very growth has diminishing returns. Not necessarily in terms of revenues (although traditional fee breaks will diminish marginal revenues). The diminishing returns I'm referring to here are, well, the returns themselves. Why?

Because, as a portfolio manager's assets grow, the range of investment opportunities shrink.

This is most readily seen in small cap stocks, where liquidity is thinner than normal.

It's one thing to buy 1,000 shares of a thinly traded stock. It's quite another thing to try to buy 1,000,000 shares. While the former can be accomplished in an almost anonymous fashion, the latter will undoubtedly move the market.

Portfolio managers are very picky when it comes to their buy prices. They can literally become "Too-Big-To-Trade" if there are not enough ask offers to fill their purchase size.

This can hurt performance in a systemic way. Systemically poor performance is not in the best interest of the client.

Why has the "Too-Big-To-Trade" conflict-of-interest been ignored for so long?

To be honest, it was once all the rage. In the 1980s, many investors were warned that Fidelity Magellan had grown well past the point of "Too-Big-To-Trade." To his credit, famed portfolio manager Peter Lynch amazed people by continuing to obtain out-sized performance results despite the size of his portfolio.

Indeed, some have suggested Lynch retired precisely because he was worried Magellan was "Too-Big-To-Trade." (His successor, who logged less-than-stellar performance, was thought to have proved the point, but later portfolio managers were able to return Magellan to its previous performance levels.)

Somewhere between the long Reagan Recovery and through the Clinton Bubble, the market's extended run of annual double digit performance results muted this concern. Who knows? It may have something to do with "a rising tide raises all boats."

In either case, this "Too-Big-To-Trade" phenomenon faded from view (again, except for a handful of portfolio managers, especially those specializing in small cap stocks).

But there was another industry-wide trend that also pushed "Too-Big-To-Trade" from the front pages. This was the evolution of the investor's mindset.

For generations, investors were taught the joys of stock investing. Magazines, TV shows, and other media forms championed the stock picker.

Financial service companies, on the other hand, quickly discovered there was more money to be made managing portfolios versus getting commission from retail stock sails (institutional stock sales were already poor revenue generators since the buy-side could often negotiate commissions down to nearly zero).

So paid advertising—both directly through consumer ads and indirectly through targeted media sponsorship – began to emphasize product selling over stock picking. Moreover, sales of financial products appeared more heavily influenced by paying salesmen than by investment performance. (Need proof of this—take a look at the most held mutual funds and you'll most of them pay commissions, 12b-1 fees, or revenue-sharing fees.)

As we moved from the stock-picking era to the product-selling era, the focus of conflicts-of-interest increasingly fell on fees (and not without good reason).

How can you avoid the "Too-Big-To-Fail" conflict-of-interest? As Golden says, the best way to do this is to only buy from fund families that regularly close their funds to new investors. But don't be fooled by simply looking at closed funds.

Make sure the family doesn't start a "sister" fund managed the same way as the closed fund. The rule of thumb is this: Each individual investment style has a critical point (which varies according to the particular style) where it becomes "Too-Big-To-Fail."

This point is measured by total assets, not by the number of individual portfolios. In other words, a billion dollar threshold can be reached either by managing one billion dollar portfolio or a thousand million dollar portfolios. They both add up to the critical mass of one billion dollars.

What product that has been growing in popularity represents a ticking time bomb along these very same lines? At the risk of offending a lot of good folks out there, I'm going to say what quite a few economists have told me. I'm not kidding about the part of offending people.

The last time I spoke poorly of this cult-like product, they came after me with torches and pitch forks. I didn't like that very much, so I've been kinda gun-shy (probably not a particularly appropriate metaphor) about discussing the subject.

But here goes.

Up to this point, everything I have been saying has been limited to actively managed funds. The problem of "Too-Big-To-Trade" has almost exclusively been discussed solely in terms of individual portfolio managers (or there firms). The solutions I've offered work in those terms.

But there's a greater demon out there that transcends the dangers of a single bloated portfolio manager. I hesitate to reveal it knowing it represents more than a trillion dollar segment of the investment management market.

For that very reason the solutions offered above won't work since it isn't isolated to a single firm, but crosses through many firms. The very same law of supply and demand that causes bloated portfolio managers to move the market infects this industry wide product.

What is this product? The answer is best explained in this article: "3 Reasons to Outlaw Index Investing Right Now (and One Selfish Reason Not To) in 5 Acts," FiduciaryNews.com, May 12, 2010).

Remember, don't shoot me.

I'm only the messenger.