In the past month, however, a firm has instituted an incentive program for its portfolio managers. U nder the program, the firm will award an all-expense-paid vacation to the Cayman Islands for any portfolio manager who generates two consecutive quarterly returns for his clients in excess of 10%.
Q: Does this violate fee structure violate any standards?
Kaplan Answer - No
I am little confused on this one - The CFA text Vol 1 p. 153 states that "Firms may pay employees on the basis of performance, but the pressure from the Firm to achieve short term performance goals is in basic conflict with the clients objectives"
Is Kapalan just wrong here. CFA is also very vague on this OK to pay on performance but wouldn’t goals such as reaching X benchmark in the next two quarters potentially cause a PM to take on more risk as a conflict of interest?
“Common sources for conflict are compensation structures, especially incentive and bonus structures that provide immediate returns for members and candidates with little or no consideration of long-term value creation.”
Source Pg 149
“Members or candidates should disclose special compensation arrangements with the employer that might conflict with client interests, such as bonuses based on short-term performance criteria, commissions, incentive fees, performance fees, and referral fees. If the member’s or candidate’s firm does not permit such disclosure, the member or candidate should document the request and may consider dissociating from the activity.”
What about: " forany portfolio manager who generates two consecutive quarterly returns for his clients in excess of 10%."
Can this at all be interpreted as not keeping the clients best interest at heart? Incentivizing managers to take excess risk, to obtain a higher return?
The Code and Standards (C&S) apply only to covered persons – charterholders, candidates, and members of CFA Institute – not to companies. A company, therefore, cannot violate the C&S.
