Date: Sun, 28 Aug 2005 19:49:37 CST
From: mes@panix.com (Michael Sullivan)
Newsgroups: misc.invest.financial-plan
Subject: Re: Financial Advisor Search?
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Don  wrote:

> "BMS"  wrote in message 
> news:RvWdnRZV1Y3dO4zeRVn-hA@comcast.com...
> > The problem is if the advisor is paid for gains today and the owner is
> > looking for growth tomorrow, their interests are not aligned.
> >
> > That's why assets managed based fees are allowed and incentive based fees
> > are not.
> >
> > Churning would be the result of manufacturing a gain, which would be good
> > for the advisor but not necessarily for the client.

> Yes, I see what you are saying; short term gains do not necessarily turn
> into long term gains. 

Well, the real problematic part is that return and risk are associated.
There are ways to generate a likelihood of huge gains by taking huge
risks.  Under your compensation model, when things go well, the manager
gets a huge windfall.  When they don't, they aren't paid, but that isn't
much worse (for the manager) than what would happen if they were more
prudent.  But it could be a *lot* worse for the client.

There are models of investment that will do much better than a typical
market basket of stocks *most of the time*, but which carry risks
unacceptable to most investors for large portions of their portfolio
(margin, futures, options, etc.).

I guess if you take a long enough view on calculating the payment you
can eliminate that, but it might be tough to find an advisor willing to
wait 10 years to know what they will be paid.


Michael