Which of the investment alternative: Provides the highest returns to the client? Provides the highest profits to Stuart&Co.? In order to find the right result for each question, I suppose the client of each situation will invest $10,000.I will make a lot of calculations to support my opinion.The process listed as Exhibit1, Exhibit2 and Exhibit 3.
Both Alternative A and C will provide the highest returns to the client depending on the period of investment. In this case, A has the highest investment return (See Exhibit 3). In this situation, ending redeemable value (ERV=P (1+T) n) and gain on investment are higher than B and C.
Other than that, the cost of investment (Cost investment = Initial payment+ Total Load or Commission) is lower than B and C. So, the ROI (ROI= (Gain on investment + Cost of investment)/cost of investment) is higher than B and C. This is because A has the highest initial payments, but B and C need to take the load out from the same initial payments. Moreover, A has a lower management fee. Instead, B has a higher load and management fee; C has a higher load. Alternative B will provide higher profits to Stuart & Co (See Exhibit 2). In this situation, the total profit of Stuart & Co. s the sum of load or commission and management fee. B is higher than A and C. This is because B requires paying load or commission at 5% to purchase. Besides, B has a high percentage management fee. 2. Which alternative should the top management of Stuart & Co. want Philip to recommend to his client? Is the company’s control system designed to ensure that choice? (The case mentions several measures used to reward the branch managers). I think alternative B is what the top management wants because it will bring the maximum profit for the company.
The company’s control system is not designed to ensure this choice. For example, the company emphasis on” developing and nurturing profitable relationship with as many clients as possible, and the specific products and service sold to clients should be dictated by the needs of those clients. ” Obviously, B is not the one which should be dictated needs of clients because clients are pursuing high ROI. At the beginning of this investment, clients need to pay 5% of his initial payment (P) to company for load or commission, which reduces his initial payment.
Also, B has the lowest average annual total return (T). During the same length period, lowest P and T will cause the lowest ending redeemable value (ERV). Besides, B has the highest investment cost. Therefore, B’s ROI is lower than A and C. 3. If Philip recommends the highest profit choice (for the company), is he acting unethically? From the perspective of the company, he is acting ethically. This is because maximizing company’s profit is company’s ultimate goal. On one hand, Philip has helped his clients make profit from their investment.
On the other side, he helps his company to achieve highest profit. It is the ideal result of company’s control system. Therefore, he is doing an excellent job at his position. It is ethical. However, from the perspective of clients, he is not acting ethically. Clients hope their investment advisor can help them to achieve highest ROI. This means they want higher gain on investment and lower cost of investment, which just conflicts with company’s benefit. So if Philip did not consider clients’ benefit but just focus on company’s benefit, his acting is unethical.