Comments on: Should we be moving to performance-pricing?

By: Christina

Christina — Fri, 19 Feb 2010 10:53:37 +0000

I guess so, for someone like me who doesn't know too much about investing, I'd rather look at the performance, this would apply to other services such as SEO. By doing so, work well done is rewarded and the other is punished with lower fees etc.

By: newrulesofinvesting

newrulesofinvesting — Wed, 17 Feb 2010 09:54:43 +0000

It's a good conversation, Mukesh. Again, I think it has to do with defining what an advisor's role is. If it's just to produce market-beating returns, you might be right. If it's more expansive — meaning, providing consultation, allocating assets, managing risks — then things get stickier.

Kaplan sells a service to help students pass tests. Not passing the test would render the service useless, unless you also grade Kaplan on their ability to help students improve (even if they don't pass). I'd say the same as doctors — most general practitioner work could be boiled down to an algorithm. It's the chance of things happening out of the ordinary that keeps us going back to docs for basic health issues. They do better than how we would do on our own.

Why can't we look at financial advisors the same way?

By: Mukesh

Mukesh — Wed, 17 Feb 2010 05:54:15 +0000

Well, if an advisor can't make more profits than a simple index, what is their value to any client? Constrast this to any other industry – for example, Kaplan provides something like a money-back guarantee of 100 point improvement in SAT scores, and an average physician makes provably better diagnosis than the best known mechanical techniques. Where is the confidence in their expertise? Are they just selling snake oil?

By: newrulesofinvesting

newrulesofinvesting — Tue, 16 Feb 2010 18:29:23 +0000

I haven't heard of such an arrangement but that doesn't mean a whole lot. Basically, what you're suggesting Mukesh is even more skin in the game for the advisor. Unlike hedge funds which only share in profits, you're asking an advisor to share in losses as well. I think you'd be hard pressed to find someone to work on this type of arrangement.

By: Mukesh

Mukesh — Tue, 16 Feb 2010 15:46:13 +0000

Here is a proposal for a performance-based compensation for advisors:
1. The client and the advisor agree on some benchmark index or portfolio and time period – say, S&P and quarterly. All profit and loss will be measured based on this index.
2. The client gives some money to the advisor for investing – say, $10,000.
3. If the advisor makes profit for the client, she gets half of it. If she loses money for the client, she pays half of it.

Are there any advisors who will work on this kind of arrangement?