No it doesn't hurt your reputation because pretty much all programs do it. Winning is what most kids care about. The good recruits aren't concerned with getting recruited over because they are confident in their abilities. Just check out the powerhouse programs as an example.
Also, most of these kids want to PLAY in addition to getting their education. ISU is not the only school that can provide an education, and often times they can find a better fit on the court as well.
I'm not saying Fred "pushes" kids out or should do that.
But I think it's ok to sit down with a kid and have a candid conversation and let him know that you don't see him contributing much in the future, but you can help him land in a good spot that he might have a better opportunity to contribute.
That is pretty much happening at every major basketball school so we have to trust that Fred can manage to do the right thing in that situation.