Charging success fees/incentives

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Sep 16, 2005 2:09 pm

The firm I'm associated with permits a success fee (10-20% of gains above a pre-determined benchmark, like a hedge fund) to be charged to investment accounts in a wrap program providing the account is minimum of $750K. 


Curious to know if anyone is currently doing this. 


Thanks


Sep 16, 2005 10:20 pm

As a client, it would only be reasonable for me to ask...if you lose me
money to a certain benchmark, are you going to credit my account back
10-20%?



 

Sep 17, 2005 2:46 pm
skeedaddy2:

The firm I'm associated with permits a success fee (10-20% of gains above a pre-determined benchmark, like a hedge fund) to be charged to investment accounts in a wrap program providing the account is minimum of $750K. 


Curious to know if anyone is currently doing this. 


Thanks




The SEC may want to tlak with you about that. That's verboten.

Sep 17, 2005 7:52 pm

Mike, I entertained you're rebuttals on my last post, but I have no interest in

an encore. I feel this forum can be all the more productive without the

constant disputation.    



What I'm referring to is already on file at the SEC on the firm's Form ADV.



Why not go to the "rookies and trainees" forum and wreak some havoc if you

have nothing to add here.



Thanks.

Sep 17, 2005 8:07 pm

Skeedaddy, I'd be oh, so careful with that.  We all know, markets go down, too.  What happens when the markets and the benchmark have a negative year and you're not down quite as much.  All your competitor has to say is, "Gee, Mr. Prospect.  You actually gave Skeedaddy a bonus for losing your money????". 


Despite what clients see as a good idea when they're making money, that account is gone.  That wouldn't be worth a small bonus now to my way of thinking.

Sep 17, 2005 10:08 pm

Here's what I see. A client of mine, made over $600,000 this year,

buying a house, demolishing it and buidling a new one. He does this a

couple times a year.



By contrast, I have clients that are up over 300% in Apple stock, for

example, and I have $300 in commissions to show for it. Next March,

I'm 40 years old. I feel like I'm getting the short end of the deal.



My avg. account is up about 17% for the year.



As a plain vanilla wrap:

$750,000 @ 1.5% is $11,250 in fees.

At the start of the next year, the acct. is up $127,500 or $877,500.



$877,500 @ 1.5% is $13,162.50 an increase of $1,912.50



Client gets $127,500 and I get a $1,912.50 increase (to my grid of

course)





With the incentive plan:



$750,000 @ 1.00% is $7,500 in fees.



At the start of the next year, acct. is up $127,500

I get 10% of that, $12,700 + $7,500 in fees = $20,250



$20,250 for the year as a percentage of $877,500 is only 2.3% of assets.



As a client, would you agree paying $20,500 to make $127,500 as an

attractive situation?

Sep 17, 2005 10:20 pm

Yes, as a client I might agree.  (I wouldn't agree if a broker would do it for $300.)  But you're not going to do that well every year.  And as a client, I'd blow my top if I paid a bonus in a losing year.


I'm not saying that I'm opposed to wrap or fee-based accounts per se.  I'm saying that I'd be loathe to use that bonus scheme.


Keep in mind that the proper use of fee based accounts is judged by whether or not it's in the client's best interests...not yours.

Sep 23, 2005 3:25 pm

Let's not be so righteous Starka. The migration of assets into hedge like structures more than validates my point. BTW, the client isn't charged if the account value drops for the year. 


The offer is to reduce my management fee 50% in exchange for a participation in the growth of the account. The point of my post is to find out if anyone on this forum is using it.


I guess those that do don't frequent this forum because they're making much more mulaaaah.



Sep 23, 2005 4:00 pm
skeedaddy2:

Let's not be so righteous Starka. The migration of assets into hedge like structures more than validates my point. BTW, the client isn't charged if the account value drops for the year. 



I'm not so sure that the migration of money to 2/20 structures that are capable of doing far more than a standard wrap account really does make your point.

Sep 23, 2005 4:12 pm
skeedaddy:

Mike, I entertained you're rebuttals on my last post, but I have no interest in an encore. I feel this forum can be all the more productive without the constant disputation.    

What I'm referring to is already on file at the SEC on the firm's Form ADV. Why not go to the "rookies and trainees" forum and wreak some havoc if you have nothing to add here.

Thanks.



Thanks just the same, "Skee", but it's an open forum and I'd rely where I like. Since we both know SEC rules don't allow sharing in client profits, why not make it clear you're talking about something you can offer only to accredited investors?<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />


To your original question, I think you'll find few people using the success fee format because they end up with an artificial pricing delineation between products. For example, a non-accredited investor is offered a wrap product at 1.5%, his wealthier brethren is offered the same process for 1% and 10%? Obviously you’re offering essentially the same service cheaper to the smaller investor, which hardly seems rational. It would seem you’d need a practice of 100% accredited investors and a pretty high octane investment process to justify 1/10.


Throw in the proscriptions to “success fees” for anyone working in a wirehouse and you have a very small pool of advisors offering the structure you’re talking about.


Sep 26, 2005 7:18 am

For once...MikeButtler has nothing to say?

Sep 26, 2005 11:53 am
rrbdlawyer:

You guys keep driving me nuts with your amateur hour antics. Have any of you thought of hiring a lawyer?  For the record, sharing in the profits in an account is NOT strictly "verboten."  Like, maybe, someone might just want to look up the rules and see what they say? I love you all, but you do send me up the wall at times.  Please look at the actual rule, which I've posted below, and note the portion I've highlighted:



I sit corrected, that's for the info 

Sep 26, 2005 11:54 am
skeedaddy:

For once...MikeButtler has nothing to say?


What can I say... my apologies....

Sep 26, 2005 11:57 am
mikebutler222:
rrbdlawyer:

You guys keep driving me nuts with your amateur hour antics. Have any of you thought of hiring a lawyer?  For the record, sharing in the profits in an account is NOT strictly "verboten."  Like, maybe, someone might just want to look up the rules and see what they say? I love you all, but you do send me up the wall at times.  Please look at the actual rule, which I've posted below, and note the portion I've highlighted:



I sit corrected, that's for the info 



Or rather "thanks for the info"