Question 10.B Discussing ad valorem (AUM) fees vs performance based fees: Discuss one advantage and two disadvantages of performance based fees - MY answer: Ad: better align the managers interests with that of the trust. The manager was presumable hired to add active return to the portfolio and will now be compensated with a performance bonus when he does. Disad: 1. Could lead to revenue volatility for the manager which could result in losses of key members of his staff. 2. Could lead to excessive risk taking if the manager is under performing his benchmark in an attempt to get a performance bonus. Schwesers answer: Ad: Compensation will be performance based and should better motivate the manager. Disad: 1. Manger has an incentive to take bigger risks when lagging the benchmark 2. Performance based fee structures are more complicated to administer. ******************************************************* My number 1 disadvantage is straight from their notes and there is no mention of this in their model answer. This is starting to piss me off. Do you think I get full credit here or would CFAI be looking for exactly what schweser has written?
I think you would get full credit… the schweser guys told us that CFAI makes their version of the answer to use for grading… then they review a bunch of exams and continuously add appropriate answers to the guideline answer and then re-grade those exams that have already been graded while looking for the newly added responses… so if you give an appropriate answer, you will receive the marks
Good info. Thanks pk.