Philip Andersen

Questions

Assume that one of Philip’s clients is a married man, aged 36 with two young children, who wishes to reallocate a significant portion of his retirement funds that are currently invested in certificates of deposit. Philip recommends a growth investment, and he identifies the three representative possibilities shown in Table A.

Table A
Three Investment Alternatives

Alternative A
Alternative B
Alternative C
Investment
Growth fund from a large investment company
Growth fund from Stuart & Co.
Exchange-traded fund
Load or commission
None
5% front-end
3% to purchase
3% to sell
Average annual total returns over last 5 years (including management fee)
10.73%
10.62%
11.01%
Risk
Moderate
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. is 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