A new but risky compensation model for advisors

A new but risky compensation model for advisors

A new but risky compensation model for advisors Would you work for tips?
 
‘Not a chance’ most financial advisors would say. But the truth is most clients would likely respect someone who’s confident enough to work without a net beneath them.
 
Silicon Valley-based start-up Instavest is testing a new compensation model that works on this very basis. Hedge fund managers working under this system of pay would eschew the traditional ’2 & 20’ model for the subjective viewpoint of clients.
 
Advisors doing a great job for their clients have nothing to fear post-CRM2 implementation. Those looking to make a quick buck will be seen as charlatans and quickly sent packing.
 
“Our lead investors work for tips (or donations). That’s right, instead of the traditional 2 & 20 rule, on our network the people who are putting their hard earned money at risk decide how much to “tip” the people managing that money,” a recent Instavest blog post noted. “To further align incentives, we also require our lead investors to invest their own money upfront in every investment.”
 
Talk about asking money managers to put their money where their mouth is, Instavest’s philosophy is the antithesis of everything hedge funds stand for — and that’s quick profits.
 
Stop and analyze the compensation model and it’s hard to find fault with it.
 
“If a hedge fund manager performed really well for you, would you give them a tip? We’ve found that most people do,” wrote Instavest. “Across our funds, the average tip that people give fund managers is 10.3% of the profits on an investment. For hedge fund managers, working for tips might just work.”
 
So when regulators sit down to contemplate whether to ban embedded commissions they might want to think twice before taking away the tip jar. It just might be the best way to align the interests of clients and advisors alike.