Performance Based Fees: Why don't you base your management fees on the amount of profit rather than the assets under management? This is an attractive idea because in theory it provides a better incentive for me and reduces the effect of the fees in poor periods. The typical arrangement is a relatively small percentage of the assets plus something like 20-25% of the profits over and above some benchmark index or above the previous highest assets adjusted for additions or withdrawals. There are two reasons why I prefer my current arrangement of fees based solely on the amount of assets under management. The first is that performance-based fees involve special regulatory requirements and hassles, and because of them some clients might not be eligible for this arrangement. That does not seem fair. The rationale for those regulations is essentially my second reason, namely that there is a potential conflict of interest. For example, say the performance fee was calculated once a year and paid annually. (The period is not important, but it makes for a convenient example.) If in October my performance for the year were quite good, a nice performance payment would be due at the end of the year at current levels. Then it would be tempting to sit out the rest of the year to protect the fee whether or not this was in my clients' best interests. On the other hand, if returns were below the level needed to earn the performance fee, it would be tempting to take greater risks in order to get above the threshold. I believe that I would resist the temptation, stick to my formulas, and not let such considerations affect my investment decisions. However, it is even better if there are no potential conflicts. Under the current arrangement, our interests are aligned: the greater the value of your account, the more I get paid and vice-versa.