Given the prompt "The standard principal-agent model is bilateral. But in reality the situation is often more like a triangle, where the agent deals with two different principals", I believe that there are a few examples of this in everyday business. In some situations the agent, or middle-man, has to work for not only his company but the client he is working for. He has to be able to try and please both parties in order to be successful. Some examples of this are a lawyer working for both his firm and the client he is representing, a mutual fund manager trying to make money for his company and also trying to make money for the people's money he is managing. Another example of this would be a political candidate representing their political party but also representing the best interest of the people in their respective districts.
My cousin went into finance and currently helps people manage their mutual funds and 401k's and things of that nature. In that position he was to make as much money as he can for his clients within the boundaries of not taking big enough risks where he loses them substantial amounts of money. He is also under pressure from his company to make more money for them as well and what stocks will help the company as a whole as well. It would be easy for a person in a situation like this to "fail" one of the two parties he is working for. He could either be making his company a lot of money and slacking on the client's end or the reverse of that. The key is to be able to find a balance between and make both parties as happy as possible to avoid any tension.
Situations in which you must try and satisfy two different parties can not only lead to extra stress on the individual, but could also make the person make bad decisions that in turn hurt both parties while trying to please everyone. Its a sticky situation to be in sometimes but you must try your hardest to please them to the best of your abilities while also doing whats best for yourself. Similar situations also occur in most friendships. In a group of friends, many times people will try to hard to please everyone and will actually end up hurting their relationship with everyone as a result. It is important to try and find that balance between making everyone happy and getting it to a point where you dissatisfy all.
(On a side note the only things I know about my cousin is what he tells me, I'm not sure if those kind of situations have any sort of restrictions law wise, but thats the most I can gather based on the information I have been told.)
The situation your cousin is in has been pretty well researched with this as the general finding. An investor can, without a money manager, buy a bunch of index funds and pursue a sit and hold strategy. Those may go up or down but the point is that by sitting on the original purchases there are no fees paid which are collected by the people managing the money.
ReplyDeleteSo that, if you will, gives the alternative to the investor. The finding is that most investors over the long haul do as well or better with the first strategy. In other words, the money managers in the equilibrium of this situation capture the additional gains that accrue to more frequent trading based on newer information when trading.
I don't know how well known that result is, but I think it is fairly well established. Yet many people continue to pay money managers to keep their portfolios for them, and as you said, they have certain investment targets in mind when they do this. I am one of them. My wife and I have a joint account that is managed this was, and I have an IRA that is also managed this way. So what explains that?
Mainly it is that I don't want to monitor things and even with the wait and hold strategy periodically you have to make decisions - say because your now have more to invest or because some note you had came due. Such monitoring may interest some investors. But to me it is a bother I'd prefer to ignore. When the market tanked around 2008 I started to lose sleep over this. But nowadays, it rarely comes to mind.
I agree with you in the thinking that the majority of people either don't want to or don't know how to regularly monitor their investments so leave that to people who do it for a living. In times of financial crisis such as 2008, people may be second guessing their investments, but at the end of the day i believe that the majority of people would find it better to trust in someone else to handle it who also has some stake in what happens if its managed poorly. The investor could make poor decisions with your money but that will end up hurting him and his company in the long run so he has to decided whats best and manage it in the best way properly. I also appreciate the further explanation of the whole process. It is vey intriguing concept to me but i have not really had the time to do the research on my own but plan on it in the near future, since I will be entering the work force in the near future and will need to think about investments much more.
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