Alignment of Interests
One of my biggest issues with Wall Street and their salesmen, the traditional financial advisors that are investing your money in a well-diversified portfolio of stocks and bonds, is that there is very little in the way of incentives for them to perform. This is pretty unique when I consider the fields that I have spent some time in, however I've never really sat down to list them out.
In baseball, you have an agent who basically manages your contract situation with the team. Instead of you personally having to negotiate with the front office or speak with them regarding your current status, it makes sense for most people to have a third party manage that sort of relationship. When it comes to compensation, I haven't really seen a whole lot of variance in how agents are compensated, so as far as I know, this is pretty much true across the board. The agent is compensated based on a percentage of the contracts they negotiate. So starting from the top, if an agent negotiates a $10MM deal for a player, they typically get anywhere from 2-5% of that, and I personally believe that is well-deserved. When players are making the league minimum, I've never heard of any agent taking a percentage of that because they're making the league minimum - they didn't do anything. And prior to that, when players are in the minor leagues, they certainly don't take any of that.
If we were to make this the equivalent of the way most financial advisors are paid, the agent would make a (hopefully) smaller percentage each year for "managing" the player's affairs. The agent gets paid no matter what happens, so they can build their business up to be mostly fee-based without actually adding much value to the player. Conversely, as it is now, if the agent never pushes the player to get to that big free agent deal, they never get paid. Interests are aligned so that when the player wins, the agent wins.
CPAs and tax advisors can have a similar structure as well. Typically, for using a tax firm's services, they will assess their fees based on how much they SAVED you in taxes by using them. If they save you little, they get paid little. Their fees are not based on your gross earnings, otherwise there would be no incentive for them to save you any money on your taxes. Interests are aligned.
Finally, in multifamily partnerships, the sponsor's interests should be aligned with the investors'. High acquisition and capital transaction fees could be causes for concern since the sponsor is motivated to get in and get out of the deal as quickly as possible so they can earn their fees, however that may not be the best course of action for the investors. The main question should be, "Where does the sponsor make the bulk of their compensation?" If they are participating in cash flows, subordinate to a preferred return, then they are motivated to optimize cash flows above and beyond the preferred return. The bulk of those generally go to the investor, so when the sponsor wins, the investor wins as well.
To be clear, there is nothing wrong with an acquisition and asset management fee to compensate for finding and running the deal. But if that is the main source of income for the sponsor, it warrants asking further questions. Ideally, the sponsor will be paid for doing those things, but the bulk of their score comes from optimizing the ongoing returns and, if appropriate, making a huge exit. If the sponsor is motivated to outperform and overdeliver for their investors, and they can make a lot of money by doing that, interests are aligned.
The events in the stock market in 2021 regarding Gamestop, Robinhood, and Citadel shed some light on what goes on behind the scenes. Payment for order flow, taking a penny on each transaction, and the imposition of regulations on ordinary investors for their "protection" showed what really goes on before the money even gets to the financial advisor. It's unlikely the ordinary advisor even understands what's going on either, but they need to pay their bills as well, so they'll take their 1% and just do what the computer tells them to do.
