You often hear about investors who don't want to take too much risk, but their financial advisors pressure them to take risks for potential higher returns. Under this model, the financial advisor (and I'm using this term to include a broker, investment banker, portfolio manager or anyone else who makes investments on behalf of clients) guarantees a certain amount of interest to the client, and in return they get to invest the principal however they want and keep any extra earnings they make on it.

For example, suppose the highest return you can get on a zero-risk investment is 5%. The financial advisor thinks that they can get a 20% return if they invest the money on the stock market, but the client doesn't want to take this risk. So, under this model, the financial advisor guarantees the client a 10% return. The financial advisor then takes the client's principal and invests it however he wants. If he can, in fact, get a 20% return, he gives 10 to the client and keeps 10 himself. If he can get more than 20%, he still only has to give the client 10 and can keep the rest. If he only gets a 7% return, he still has to pay 10% to the client.

So the client has the advantage of a guaranteed return that's higher than you'd get with a traditional zero-risk investment. The financial advisor has the advantage of using his investment prowess to earn more money than he would if the client chose to stick with traditional zero-risk investments, and doesn't lose the trust of the client by pressuring him to take more risks than he's prepared for. And it might even be beneficial to the economy, if it is in fact true that the economy benefits when more people make risky investments.

(I don't know if this concept already exists. I tried googling it and didn't find anything, but that might be because I don't know what it would be called if it did exist.)
-- impudent strumpet, Nov 09 2003

Bedlam plc http://www.bedlamplc.com/
No gain, no fee. [DrBob, Oct 04 2004]

That would be a money market account or CD. Other than that, it's against the law for a broker to absorb your losses.
-- DrCurry, Nov 09 2003


Given the state of the market, I doubt that any broker would go for it, unless they were guaranteed 100% of the gains as well.
-- Cedar Park, Nov 10 2003


Zero risk????? What happens when the advisor loses your principal? Sounds like you pay.
-- wayout, Nov 10 2003


Bedlam plc go some way towards this in that they have a minimum level of return below which you do not pay them a fee but then, of course, if they make their target the fees go up.

If you want a guaranteed return then really you're looking to government issued paper, preferably index-linked, but you aren't going to get spectacular returns that way. Just a steady income.

The one thing to bear in mind when investing is the simple formula Higher Return = Higher Risk, so there's no way that any *reputable* business is going to guarantee you a high return and certainly not without you taking all of the risk on yourself.
-- DrBob, Nov 11 2003



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