If they accepted your offer (notwithstanding FINRA prohibitions), you might be very sorry. You've built in a very perverse incentive here. The planner would be incentivized to pick a wildly aggressive and highly leveraged portfolio for you. Example: Say the market in equities is flat the next year--zero return across all equity indices. If he takes your offer and, say, buys options on a single stock for your portfolio and it goes to zero value in 75% of his attempts, he's lost nothing (but his time) but you'd be broke. If it doubles in value the other 25% of the time (terrible odds), he'd make $30,000 (which is 1.5% of $2 million, the "regular commission you offered him if he beat the market) + $200,000 (the sweetener you offered him (right?) 100 x .001 x $2 million) = total compensation of $230,000.Here is a great way to find out just how in tune your financial planner is with your financial well being. Ask him/her if they'd be willing to adopt the following payment structure:
In years when your investment advice beats the market index it is categorized with, you keep commissions plus I'll pay you 0.1% of every percentage point over the market you get, but in years when you trail the index, you must forfeit your commission for whatever products you sold me to be added to my account.
I still have yet to find a planner willing to go for it. Seems if they are all above average they'd all be jumping at the opportunity. If they just beat the average market return of an index 6 out of 10 years they'd be ahead by my model... so I wonder why they run from it
He'd be sending 75% of his clients to the poorhouse, but still making double the compensation he'd make if he'd stuck with the straight 1.5% commission.
Bottom line: The compensation formula you've outlined incentivizes highly risky investing behavior and wouldn't do a good job of selectively rewarding a skilled advisor. Even a coin-flipper would make out well if he chose a portfolio with sufficient risk.
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