Conference nyoss1::market_investing

    My question for the advisor is... what if the investment doest not make
    anything for a year (or maybe two) due to poor market conditions. What
    is the advisor going to live on? I know what he/she lives on is not
    really of your concern. But, you do want them to stay alive so they can
    keep on performing.  :-)
    
    My guess is that in case of a "bad year", the advisors will have play
    agreesively with options and so on in trying to make a profit -
    therefore to generate a commission. But, this increases the volatility 
    of your portfolio. If you are a natural risk taker, that may be just 
    fine for you. But, if you are not, you may want to think hard if that 
    investment style suits you or not. 
    
    Mike

>Has anyone heard of investment advisors who are paid based upon how well
>your investments perform?
>
>It seems that most investment service providers are set up so that they make
>money is always received from the investor regardless of how well the 
>investment performs.  

     I'm exploring becoming a Registered Investment Advisor and was told 
by my lawyer that performance based fees are illegal.  

>      I'm exploring becoming a Registered Investment Advisor and was told 
> by my lawyer that performance based fees are illegal.  

	Isn't that basically how Hollywood agents are paid?

re: .1

|    My question for the advisor is... what if the investment doest not make
|    anything for a year (or maybe two) due to poor market conditions. What
|    is the advisor going to live on? I know what he/she lives on is not
|    really of your concern. But, you do want them to stay alive so they can
|    keep on performing.  :-)

     Good question.  The advisor would have to live through the lean times
     by either living off savings or a second income.  The second income
     may come from a spouse or a day time job.  If the advisor was good enough,
     the good years should make up for the bad years.
    
|    My guess is that in case of a "bad year", the advisors will have play
|    agreesively with options and so on in trying to make a profit -
|    therefore to generate a commission. But, this increases the volatility 
|    of your portfolio. If you are a natural risk taker, that may be just 
|    fine for you. But, if you are not, you may want to think hard if that 
|    investment style suits you or not. 
    
     If I were the investor, I would be reluctant to allow the advisor to
     use options.  But this might be OK for other investors.  Should the
     advisor incur significant loses, I would suspect that the investor would
     look for a new advisor.

     Perhaps the fee schedule needs to be more sophisticated.  For example,
     in a year when all the major stock market indexes are down, maybe the
     advisor deserves a fee for providing a 2% return?

     Part of the reason for posting the base note was to determine what
     might be a viable fee structure for both parties.  Whatever that fee
     structure is, it should encourage the advisor to pursue the investor's
     interests: seek growth at reasonable risks.  The investor should
     define the limits of reasonable risks (option trading, % of assets in
     one stock, minimum capitalization, etc).  If the advisor believes that
     sufficient growth can be obtained with these limitations, then both
     parties may benefit from the relationship.

re: .2

|      I'm exploring becoming a Registered Investment Advisor and was told 
| by my lawyer that performance based fees are illegal.  

      Could you elaborate on this?  I find it hard to believe that this would
      be true.  Why would it be legal to pay salespeople, professional
      athletes, and farmers based on their performance; but illegal to do so
      for investment advisors?

      Is this a federal law or SEC restriction?       - John Hildebrand

I wasn't aware that it is illegal for Investment Advisors to use
performance based fees (although I'm sure its probably true).
I am familiar with the regulations governing stockbrokers, and it
is indeed illegal for stockbrokers to base their fees on performance.

I don't remember if its a SEC or NASD regulation, but its there.
My guess is that the likely reason is to protect the solvency of
brokerages during market downturns - which is one of the primary
concerns for those who regulate the financial markets.

re: .5

| I wasn't aware that it is illegal for Investment Advisors to use
| performance based fees (although I'm sure its probably true).
| I am familiar with the regulations governing stockbrokers, and it
| is indeed illegal for stockbrokers to base their fees on performance.

| I don't remember if its a SEC or NASD regulation, but its there.
| My guess is that the likely reason is to protect the solvency of
| brokerages during market downturns - which is one of the primary
| concerns for those who regulate the financial markets.

I can understand why a stock broker would not be paid for advice.
Their function is to broker an exchange between a buyer and a seller of
a given stock.  However, many brokerage houses charge huge commissions
to account for the "expert advice" that they provide.  The problem with
advice from brokerages is that they are only paid when a trade is made.
This promotes account churning in which the broker generates fees by
advocating frequent trades that may not be in the best interest of the
investor.

This is one of the reasons that discount brokers have become popular.
The discounters simply execute your trade as cheaply as possible without
giving advice nor incurring extra expenses by doing so.  With the
discount brokerages, it is up to the investor to make their own buy
and sell decisions.

So what is an investor to do if one wants to buy/sell stocks, but does
not have the time nor motivation to due sufficient research?  Mutual funds
are one option, but mutual funds are not very personalized.  You may find
some that meet your risk and growth obtectives, but you still need to do
the research to find out which ones are right for you.

To me the solution to this problem is an independent investment advisor.
By independent, I mean that the advisor would not profit by any transaction
fees that the brokers get.  In fact, such an advisor would probably minimize
trades to the investor's advantage assuming that the advisory fee was based
upon performance (stock increases + dividends - stock decreases - brokerage
fees - SEC fees).

Most of the "financial advisors" that advertise their services are no more
than sales people for mutual funds and other investment instruments with
steep commissions and front and/or back end loads.  Advice from these
advisors should be taken carefully or not at all.

I would prefer to invest with an advisor whose fortunes were tied to my own.

Just my $0.02,       - John Hildebrand

>I would prefer to invest with an advisor whose fortunes were tied to my own.

     I agree, and would prefer my fee to be strictly performance based to
show my faith in what I'm doing, but the law says no.

    Well, I would probably not like to work with an advisor using anything
    like the fees suggested in .0.
    
    Why not?
    
    This schedule encourages the advisor to accept high risks to be carried
    by the customer.  The advisor would earn good money on high returns
    (usually associated with high risk) and not be punished if the customer
    actually lost money.

    >     This schedule encourages the advisor to accept high risks to be
    > carried by the customer
    
    And that's probably the reason why it is illegal. Orange county is a
    cautionary tale. The manager of their funds was given the task of
    achieving as high a yield as possible, since return on investment is a
    more popular way to raise money than taxes. So he was essentially
    graded on performance, and his performance was great for a while, but
    he needed to take increasingly higher risks to keep it up.
    
    The safest (and cheapest) way to get yourself an advisor who will work
    to maximize your return is to put your money in a mutual fund.
    
    			Jim

    re: .7  What law are you referring to.  Are you taking about
            SEC restrictions?  If so do these apply only to stock brokers?
    
    re: .8  I would expect the opposite behavior from an advisor who
            received a fee based on performance.  I would think that the
            advisor would take a very defensive postion if the investment
            (and hence the fees) were threatened with losses.
    
            Contrast this with mutual funds.  Excluding loaded funds, most
            mutual fund companies get a percentage of the assets invested
            regardless of whether the fund is making or losing money.
            The feedback mechanism here is that investors tend to pull
            their money out of poor performing funds and put the money into
            good performing funds.
    
            To avoid these withdrawls, you will often see the mutual funds
            getting their spin doctors to highlight the positives.  So
            after a bad year all the brochures talk about great performance
            for the past 5 or 10 years with no mention of the bad year
            just past.
    
            But you do make a good point.  Advisors would not lose any
            money though the investor can.  But with mutual funds the
            advisor can make money while the investor does not.

    
    re: - few
    
    	And an excellent reason to use an S&P 500 Index fund as the
    mainstay for your "fund wheel". Most funds over time do not perform
    as well as the Index as a whole. Index funds have very low fees
    (Vanguard is super), and very low cash positions so they are always
    "fully" invested.
    
    	The individual investor can then use other funds like sector
    funds, mid and small caps, foreign funds for the "pop" in your
    overall strategy while keeping your risk minimalized.
    
    	As for the first six months of this year, only 8% of all funds
    (over 5200 at last count) beat the S&P 500, which was at 22.4%.
    
    	IMHO, forget the advisors and use several good funds to do it
    yourself. I use Vanguard 500 Index as my core (50%), Fidelity
    Electronics (15%) for my sector fund, Heartland Value (20%) for
    my small/mid caps, and Templeton Foreign (15%) for my overseas
    investing. With the terrific year so far, I'm better than the averages,
    but not by much (3 points). Beating the norm is very, very tough over
    time. But with a good index fund, sleeping at night is a breeze...
    
    		the Greyhawk

    re. 11
    
    The cover story in the current issue of Money touts the strategy you
    are using which I concur with and use myself.