Only Pay Recompound When Profitable. Wait, What?
Recompound is a new concept. It is important for anyone who is keen on using our product to understand how our fee mechanism work. We want our potential customers to know what they are getting themselves into.
TLDR;
(but please read the entire article): We evaluate your portfolio value at the end of the month. If it surpasses its previous all time high value, then we will see the difference between the new all time high and the previous one. We apply 20% to that value and that becomes our fee for the month. No management fees.
Motivation
Incentive Alignment
Before we get deep into the mechanism, we’d like to explain a few key factors that have led to our current fee design for our customers.
As a service provider, our focus is to ensure that our incentive is as closely aligned as possible with our customers. Our customers’ interest in participating the market is sustainable profitability. They are motivated to grow their wealth in the long run. However, as our customers are mostly busy professionals, this goal is usually constraint by their inability to have sufficient time to perform three crucial tasks to invest well consistently, those are:
Doing a comprehensive due diligence.
Making rebalancing decisions based on market and stock price behavior.
Monitoring the market and invested stocks closely for earnings call, latest financial statements, etc.
As a result, in order to invest well and have ample time to focus on their day job, they have to somehow outsource these tasks elsewhere. Question is, how do they outsource this task?
In our opinion, the best indicator of how well we do the 3 points above is the profitability of the portfolio. Better the due diligence and investment strategy usually translates to better results. Simply put, consistent performance is the hallmark indicator of how good an investor is, in all market conditions.
That is why, a third party that can offer a service that receives payment based on profitability of their clients, has their incentives more properly aligned.
At Recompound, our fees directly come from the profits of our customers without any management fees. Should our customers fail to grow during a period of time, our customers become a cost to us. Therefore, we are commercially incentivised to make our customers’ portfolio grow to an all time high value for us to be eligible for payment and continue our business.
Furthermore, our clients’ portfolio performance is computed as a whole instead of per individual stock basis. For example, there is a scenario where our client purchases stock A, B and C. If stock A is profitable but B and Cs losses causes the entire portfolio value to plummet, then Recompound will not apply our charges. Why this way? This is because the motivation of our clients is to grow their investments collectively as a portfolio. Therefore when there is an underperforming stock, Recompound is motivated to inform our clients in a timely manner to rebalance and go after other stocks with better prospects.
Our Customer Profile
To reiterate, our customers are professionals & entrepreneurs working at renowned companies. Mostly, their motivation is to ensure that their money does not stay idle in the bank and their money can be working as hard, if not harder than them. With that, our customers’ engagement with us is more long term oriented instead of short term.
Instead of focusing on quick gains and then taking profits at meagre percentages, we would rather our customers be invested for a longer period of time. Staying invested for a longer period of time simply means buying and then holding, usually months if not even years before actually taking profits.
As we are a business entity, a consistent cashflow is important. Therefore, we cannot afford to wait for months if not years on end before we are eligible for payout. If we are only eligible for payment after the profit is realized, this would create a non-trivial issue for our clients. We would be incentivized to encourage our customers to trade and rebalance too frequently. This is not ideal for our clients for two reasons:
Higher transaction fee if our clients rebalance frequently
Our clients are busy which carries a risk of missing out on the investment information we provide
Therefore, the best compromise is for our clients to pay us even if their stocks’ profits are not realized yet, as long as the market value of their entire portfolio breaks its all time high value. Then our priority becomes to prioritize consistent performance instead of a one hit wonder (unsustainable with this fee mechanism).
The Mechanism
Based on the motivation of the fee structure that has been expounded above, we are ready to explain thoroughly the mechanism of the fees applied to our customers.
In short, we will evaluate the market value of all of our recorded clients’ portfolio at the end of the month. If the entirety of the portfolio market value breaks it’s previous all time high value, then we will apply our fees. This ensures that their profits are only charged once.
What if the client decide to top up an amount X to their existing portfolio? No problem, it simply would mean that their previous all time high or high water mark is added by X. The same if the client decides to withdraw a portion of their portfolio by Y, then their high water mark will be reduced by Y.
Lastly if the client decides to withdraw completely, then we will look at the portfolio value on the day it is being withdrawn. If it surpasses its previous high water mark, then we would apply the fees.
Example Fee Illustration
For a more detailed illustration, consider the scenario where Alice commits IDR 50 million with Recompound:
Initial portfolio value: IDR 50 mio High Water Mark (HWM): IDR 50 mio Previous High Water Mark (PHWM): IDR 50 mio
End of first month portfolio value: IDR 52 mio HWM: IDR 52 mio PHWM: IDR 50 mio
Fee: 20% * (52 - 50) = IDR 400,000
End of second month portfolio value: IDR 51 mio HWM: IDR 52 mio PHWM: IDR 52 mio
Fee: IDR 0
End of third month portfolio value:
IDR 53 mio HWM: IDR 53 mio PHWM: IDR 52 mio Fee: 20% * (53 - 52) = IDR 200,000
Suppose there's a top-up of IDR 50 mio in the fourth month, the HWM becomes IDR 103mio. End of fourth month portfolio value: IDR 101 mio
HWM: IDR 103 mio PHWM: IDR 103 mio
Fee: IDR 0
End of fifth month portfolio value: IDR 105 mio HWM: IDR 105 mio PHWM: IDR 103 mio
Fee: 20% * (105 - 103) = IDR 400,000
Suppose there's a withdrawal of IDR 50 mio in the fifth month, the HWM becomes IDR 55mio. End of sixth month portfolio value: IDR 56 mio HWM: IDR 56 mio
PHWM: IDR 55 mio Fee: 20% * (56 - 55) = IDR 200,000
Closing Remarks
To conclude, we believe that setting up a fee structure that is fair and sustainable is key for a successful long term partnership with all of our clients. By carefully understanding the needs of our target audience, we are able to come up with a win-win solution for all parties involved in the partnership.