In: Finance
Advisor 1 |
Advisor 2 |
Advisor 3 |
Commission |
Fee |
Fee + Commission |
4% initial cost to purchase investments |
1% annual fee of asset under management |
$7,500 first year planning fee |
Annual management fee beginning in second year |
2% cost to purchase investments |
|
0.5% Annual Management Fee beginning in second year |
0.10% Annual management fee beginning in second year |
|
8.50% |
8.0% |
7.50% |
Compensation Method QuotedCosts Average historical rate of return on similar accounts |
Instructions
Use this information to answer the following questions.
Please see the table below. Please be guided by the second column titled “Linkage” to understand the mathematics. All the sub parts have been answered in line. The rows highlighted in yellow contain your answer. Figures in parenthesis, if any, mean negative values. All financials are in $.
Linkage | Advisor 1 | Advisor 2 | Advisor 3 | |
Investment | A | 350,000 | 350,000 | 350,000 |
First year charge | b | 4% | 1% | 7500 + 2% |
Part (a) First year expense | C = A x b | 14,000 | 3,500 | 14,500 |
Net investment | D = A - C | 336,000 | 346,500 | 335,500 |
Annual return | r | 8.5% | 8.0% | 7.5% |
Part (b) Account balance at the end of the first year | E = D x (1 + r) | 364,560 | 374,220 | 360,663 |
Second year charge | f | 0.5% | 1.0% | 0.1% |
Part (c ) Second year expense | G = E x f | 1,823 | 3,742 | 361 |
Balance at the beginning of the second year | H = E - G | 362,737 | 370,478 | 360,302 |
Account balance at the end of the second year | I = H x (1 + r) | 393,570 | 400,116 | 387,324 |
Growth factor net of expense over next five years | J = (1 + r)5(1 - f)5 | 1.4664 | 1.3973 | 1.4285 |
Part (d) Account balance at the end of the 7 years | K = J x I | 577,146 | 559,089 | 553,280 |
As the account balance at the end of 7 years is highest in case of Advisor 1, they should choose Advisor 1, if their goal is to maximize the value of their investments after 7 years.
This is because Advisor 1 has the highest annual rate of return that gets compounded, It has higher initial cost but a moderate annual fees. So, the analysis indicate that