Didja’ ever notice that how you measure something sometimes changes the outcome?

In the 1980′s CEO’s compensation changed from a salary-and-bonus plan to being directly tied to the stock price, and voila, stock prices rose.  The companies weren’t necessarily managed any better, but since stock price was suddenly the important metric, it improved.

A similar effect can be seen in Massachusetts schools which are ranked by statewide tests (MCAS).  An increase in the scores, doesn’t necessarily mean that the students are any smarter, but they are doing better at passing the exams, leading to much discussion about “teaching-to-the-test.”

Likewise, many financial advisors are paid by a percentage of assets under management.  The rate is typically 0.5-2.0% per year, where the low end of that range is for account values north of $1M.  If you have $200,000 in an advised account that charges 1.5%, you pay $3,000 per year for that advice.

Not only do I think that’s an awful lot of money, it isn’t judging the right metric.  Sure, I want my investments to grow, but what I really want is my net worth to grow.  Designing the advisory fee around just one aspect of your net worth focuses their activity around just your investment — typically brokerage — accounts. Continue Reading »