Question

Pelican Point Financial Group’s clientele consists of two types of investors. The first type of investor makes many transactions in a given year and has a net worth of over$\mathbf{\text{(1.5}}$ million. These investors seek unlimited access to investment consultants and are willing to pay up to$\mathbf{\text{)20,000}}$ annually for no-fee-based transactions, or alternatively, $\mathbf{\text{(40}}$per trade. The other type of investor also has a net worth of over$\mathbf{\text{)1.5}}$ million but makes few transactions each year and therefore is willing to pay $\mathbf{\text{\$120}}$per trade. As the manager of Pelican Point Financial Group, you are unable to determine whether any given individual is a high- or low-volume transaction investor. Design a self-selection mechanism that permits you to identify each type of investor

Short answer

The firm's management will be able to evaluate their two programs which best matches each client and maximizes their advantages once they have more informationabout the clients.

Step-by-step solution

Self-Selection Device 

Self-selectionis a contraption through which information-possessing parties are bestowed with various options, and the option selected by them discloses their underrated features to the uninformed parties. It is a tool for screening.

Asymmetry of information is removed or minimized using both screening and self-selection.

Learning about Clients’ profile 

Pelican Point Financial Group's manager offers two types of assets for its clients with a net worth of more than $\text{\$1.5}$ million. The firm's initial plan gives a no-cost transaction, which works out to$\text{\$40}$ per trade, but there is a $\text{\$20,000}$fee for counseling and maintenance services. The firm's second plan charges $\text{\$120}$ per trade and includes no further maintenance or consulting expenses.

The manager must first comprehend the client's profile and be able to categorize them into one of several categories before assigning them to the proper plan in order to decide which of the two plans to provide each investment. By doing this, the risk of a potential investment loss is reduced as well as problems like hidden features and adverse selection.

To learn more about each client's profile, asking the following questions in the first instance. It's all about establishing their present financial condition, which includes things like income, spending, and obligations.

It is critical to define the financial objectives in a practical and precise manner. Questioning about time frame for this process helps us to determine what sort of strategy may be altered depending on the given aims.

Types of Investor 

The manager usually chooses one of three options:

• Conservative Investor: A conservative investor is one who seeks to keep his money safe. They are aiming for a profit margin of roughly$\text{2\%}$to$\text{3\%}$.

• Moderate investor: This sort of investor is defined by taking on more risk than a conservative investor in exchange for a higher return than inflation and the ability to save. They're aiming for a profit margin of roughly$\text{6\%}$to$\text{10\%}$.

• Dynamic investor: This sort of investor aims for a bigger profit margin, but is aware of the hazards involved. They anticipate a return of more than$\text{10\%}$on their investment.

With additional information about the clients, the firm's management will be able to evaluate which of the two plans they provide best matches each client and maximizes their advantages.

Therefore, with more information on the clients, the firm's management will be able to determine which of their two programs best suits each client and maximizes their benefits.