Agency Problem Project Essay

Submitted By Mlmurphy4G
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Pages: 5
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Agency Problem Project
Group G
Morgan Murphy, Grant Corcoran

1. Fee-based Advisory. Getting paid for portfolio management and financial planning work, and charging fees to your clients, puts you in a unique and uncomfortable position that most businesses don’t face. You have near-total access to your clients’ financial situation. You know how much they can afford to pay you, and then you can determine your fee accordingly.
No other business is structured quite this way. Most services that a company or person can offer have a set price per specific service or have cost adjustment techniques used to determine the price once the job has been appraised. For financial advisors, we can get in to a lot of trouble if our prices are not consistent.
The agency problem here is based on an ethical premise. We have the ability to basically determine what our clients are able to pay us based on their finances in which we manage. We know who can afford to pay us more, and who is financially stressed and reluctantly paying for our guidance.
Having this information, it becomes hard not to have the desire to upcharge a high net worth client that regularly causes you headaches and takes much more of your time than your lower tier clients. On the other hand, it wouldn’t be fair to discount fees for those clients who you know could really use it.
Obviously in this case the advisor would be the agent and the client would be the principal. The agent stands to make a lot more if they decide to charge clients that are well off more for their services. Although the agent may be more willing to work more diligently on that specific portfolio, the principal loses out on the returns due to the increase in fees on that money earned.

2. Inventory Quotas. In a retail environment most sales staff are given en employee discount so they will serve as additional marketing for the brand. Sales staff are also required to achieve a sales quota over a specified period of time. This may be a dollar amount or a certain number of inventory. When sales staff are given an inventory quota agency problems may arise due to the temptation of sales staff using their employee discount to persuade customers to purchase more of a product. This type of agency problem occurs between sales staff (agent) and company owners (principal).
For example, Sally (agent) is a sales representative for a protein shake company (principal). She is required to sell 10 packs of protein shakes a week to meet her quota. Sally is also encouraged by her company to use the shakes herself and is given a 20% discount every time she orders protein shakes. If Sally offers her customers the same 20% discount on protein shakes they will be more willing to buy them for her; all Sally has to do is purchase the shakes using her discount. Sally still meets her sales quota for the week; however, the protein shake company is losing 20% of their sales due to an agency problem.

3. Dollar Amount Quotas. As explained above, sales staff can be given multiple types of quotas to meet over a period of time. A dollar amount quota can cause a similar type of agency problem but this time it is between sales staff and customers. If sales staff are assigned a dollar amount quota they will be more likely to push products of customers that are not beneficial to them. This causes distrust between customers and a company’s sales team (agent) and ultimately causes customers to take their business elsewhere; losing money for the company owners (principal).
For example, Ben (agent) works for a tanning salon (principal) and has just been promoted to a sales representative. Ben is having trouble meeting his sales quota, which is $.50 per customer that he processes to tan a day. He really wants to keep his position so he starts selling products to customers that they don’t actually need. Even worse, Ben starts to sell some products to customers that diminish their experience at the tanning salon. These clients soon realize
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