There has been much debate about whether investment managers should be paid a fixed fee linked to the size of the assets they manage, or a performance-based fee that ties their compensation to how well they do for the client.
Most traditional advisors and mutual fund managers are paid a fee based on the assets under their management, and not based on their investment results. This arrangement reduces business risk for the advisor, and ensures that advisors do not get unfairly penalized when investment results are poor due to factors outside their control.
On the other hand, most hedge fund manager receive all or some of their compensation as performance fees. The thinking behind this is that hedge fund managers have significant freedom in their trading strategies and what they can invest in, so theoretically should be able to make money in any market environment. Also, a performance-based arrangement aligns the interest of the manager with its clients more closely.
Now ModernAdvisor asks: If as a retail investor you were given the choice between paying an advisor a fixed percentage of your assets under management or a performance fee linked to your investment results, which would you choose?