There’s been a lot of talk recently about commissions (especially embedded fees) paid to financial professionals. In the past it was often hard to pin down just what financial advisers were making off their clients and how fees were calculated. Public pressure has made the fee collecting process more transparent, but there are still questions about conflict of interest and the adviser’s impartiality.
As a former financial adviser with a major bank, I am very familiar with the process. A bonus structure and incentives puts emphasis on the sale of certain lucrative products. It’s possible that a new product truly is right for your needs, but is the banker keen to sell it because he or she receives some kind of incentive?
Financial services is not the only industry that can be perceived as not acting impartially and in the best interests of clients.
Several months ago, MoneySense editor Duncan Hood said about his experience in purchasing his home:
“Some of the people I thought I hired to work for me were secretly working for someone else.”
That “someone else” is, of course, themselves. Most transactions are not as transparent as you think.
Realtors get paid only when the deal is done. They make more money when they sell more houses rather than getting a higher price. Their commissions don’t reduce much (a few hundred dollars) as compared to a reduction in the selling price, which could be several thousand dollars. When the selling agent also acts as the buying agent they receive the entire commission.
When potential buyers want to take their time to look at a lot of houses the realtor may start trying to convince them to either lower their expectations or raise their price to speed up the process. They may also imply a sense of urgency to put in a bid quickly or try to convince a seller to lower their price.
Lenders pay mortgage brokers their commissions. If one lender pays out more than a competitor, could that temptation result in a conflict of interest? There are also larger payouts for higher interest rates and longer terms.
Sales staff gets incentives too, and I’m not just talking about those who work on a commission basis. Manufacturers offer incentives on certain products sold in retail stores, or some may have a higher profit margin.
Extended warranties are pushed on sales of electronics, automobiles, appliances, furniture, and even toys. According to Consumer Affairs, businesses can realize more than 200% profit from these sales, part of which goes to the sales clerk.
Have you ever been talked into getting a store credit card at the cash register? Sales staff and cashiers receive cash or “points” that can be turned into cash or merchandise. I know one cashier who almost furnished her entire house, including an 80-inch TV, with the bonus points she received. It’s up to the customer then to deal with a credit card and its 29.9% interest rate.
Of course, not every professional is motivated by money. Many sales people give good customer service and want you to be satisfied.
Related: What I learned from working retail
Be an informed buyer. The more you educate yourself about the products and services you are considering, the better off you’ll be. It’s up to consumers to make sure they get the best from the salespeople they encounter. You can always terminate the relationship if you are not satisfied.