Case Questions- PHILIP

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
Moderate
Moderate
Management fees
0.4%
1.2% –
For Client
110.73% – 0.4% - 1 = 10.33%
0.95 * (110.62% - 1.2%) - 1= 3.95
0.97 * 111.01% *0.97 – 1 = 4.45%
For Stuart
-
5% + 0.95 * 1.2% =
6.14%
3% + 0.97 * 111.01% * 3% =6.23%

1. Which investment alternative:
a. Provides the highest returns to the client?
b. Provides the highest profits to Stuart & Co.?

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2. If your answer to (b) is not the same as your answer to (a) and Philip recommends the highest profit choice, is he acting unethically? Why or why not?

3. 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?
Philip
Philip Anderson

1. Which of the investment alternative:
Provides the highest returns to the client?
Provides the highest profits to Stuart & Co.?

Alternative C provides the highest returns to the client. It has the highest average annual total returns over last 5 years (net of management fees). And its load or commission is moderate.

Alternative B provides the highest profits to Stuart & Co. It has the