Equities Trade “DIRTY” – What that Means and Why it Matters

Overview: The purpose of this whitepaper is to educate readers about a flaw in our market structure, that causes income-producing securities to trade “Dirty." Dirty security pricing causes investors to pay inflated values for income-producing securities and then...

In this article, we review some commonly asked questions related to FairShares technology and its implementation.

Does the use of FairShares technology, which properly values an investment fund by not including realized income in the net asset value, impact the asset management revenues earned by the manager?

No, the revenues earned by the asset manager are not affected.  Asset managers are still managing the realized income received by the fund, even though those assets have been declared as payable to investors. Therefore, they will continue to bill on the total amount of assets being managed, and a discounted net asset value does not impact their revenues.  This makes FairShares a win/win as the investor gets “best execution” via the discounted net asset value. However, the manager is still compensated for the total amount of money under management which is equal to the NAV plus the funds realized income.  Lastly, FairShares improves the compound annual returns earned by the investor.  When investors earn higher returns, so do their asset managers.

How Does FairShares Help an Asset Manager Increase the Revenue Generated from their Investment Funds?

FairShares is a value-added service that an asset manager can offer the shareholders of an investment fund for a small fee. FairShares allows an asset manager to set their own fee schedule, subject to a minimum FairShares fee. The additional revenue generated can be substantial and will help asset managers cope with industry-wide fee compression, all while adding tangible value to their shareholders.  For example, FairShares can create an additional 25 basis points or more of return for a low-cost S&P 500 fund that charges 3 basis points in management fees per year. If this fund that now utilizes FairShares can increase their management fee to 4 basis points, net of FairShares nominal licensing fee, the fund can boost annualized revenue by 32%!

Does using FairShares require a complete overhaul of an asset manager’s systems and infrastructure?

No, the effort required to use FairShares requires no more energy than the effort needed to process distributions in a traditional fund.  All that is needed by FairShares is a record of shareholder ownership for the payment period.  Once this record is retrieved, the equitable distributions are made by pressing a button.

Does FairShares’ technology comply with the various investment advisor regulatory acts?

Per our legal counsel, we have not identified any conflicts with any regulatory act, nor have we identified any conflict with existing tax law.  The regulations stipulate that dividends should be paid at least once a year, but do not address the specific manner in which they shall be paid.

Is FairShares’ technology patented?

We have filed 4, and soon to be 5, Patent Cooperation Treaty utility patents with the World Intellectual Property Organization.  These patent filings give us intellectual property protection in 153 countries.  The patents cover all the necessary systems, methods, and processes needed to manage our equitable distributions.

Can FairShares be used with mutual funds that have omnibus accounts?  

Yes, absolutely.

How are dividends removed from the net asset value?

Dividends are removed by an accounting process that declares dividends daily or journals dividends as liabilities, less any expense accruals if applicable, which can remain undeclared.  For example, depending on the fund type and their expenses, the fund could choose to declare ~90% of dividends received daily.  This process removes almost all the dividends from the net asset value and dramatically reduces losses realized by the fund’s shareholders.

Are you declaring dividends daily to only the shareholders of record on that day?

Absolutely not.  Declaring daily dividends to shareholders of record is an administratively burdensome process that is not possible with many fund types (i.e., ETFs).  Furthermore, declaring dividends daily to shareholders of record will not work for single securities like IBM or single fixed income securities.  Since these funds pay no daily dividends, there is nothing to declare.

Declaring daily dividends to shareholders of record also 1) does not guarantee that an investor receives income every day like FairShares does, 2) creates a scenario where a buyer has a 50% chance of underperforming their benchmark because income does not flow into the fund evenly, 3) results in all buyers for the period having different yields (with FairShares, yields are consistent), 4) requires complex sub-accounts to be created and maintained for every investor, 5) could have adverse tax consequences and 6) with FairShares’ technology, we can pay people using any time interval.  Time intervals allow investors to be compensated for every day, hour, or minute they own an ETF or exchange-traded product that earns income.

Do investment managers owe a fiduciary duty to their shareholders?

Investment advisors have a fiduciary duty to provide “best execution.”  Best execution means that investment advisors “must execute securities transactions for clients in such a manner that the client’s total costs or proceeds in each transaction are the most favorable under the circumstances.”

Does FairShares work for ETF’s?

Yes – and we are eager to get started with these products.

Does FairShares work with single securities like IBM?

Yes, FairShares will allow IBM to be priced in a manner that reflects its actual value.  IBM pays a $1.62 quarterly dividend.  Therefore, the day before the ex-dividend day, the price of IBM trades at a $1.62 premium to what it is actually worth.  If you buy IBM the day before the ex-dividend day, you could lose half the dividend payment in unnecessary taxes.

Can FairShares be used on single fixed income securities?

Yes – we have patents filed on how to transform the fixed income market in a way such that buyers of fixed income no longer need to pay accrued interest.  Call us to discuss this in greater detail.

How can an investment manager begin using FairShares products to create higher returns for their shareholders?

Call Jeremy @ 212-419-8394 or email jeremy@buyfairshares.com to schedule an introductory meeting.


Jeremy Roseberry


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