The Conflict Of Interest In Sales
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.
Related: Engineering a better outcome for investors
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
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.
Related: Do you need a real estate agent to sell your home?
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.
Mortgage brokers
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 people
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.
Final Thoughts
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.
It’s all buyer beware. If you were stupid enough to get a Best Buy credit card at the til to buy things you couldn’t afford, that’s your own problem. I just treat anyone that receives a commission like a used car salesman. They are out for their own gain and nothing else. It’s up to me to be educated. Commissioned sales people are the worst people to deal with in any industry. My rule is, “Don’t listen to ANYTHING they say, they are there merely to talk final price” The rest is up to me. I spread this lovely mentality to anyone who will listen.
“Buyer beware? That’s a little Darwinian for me. I’d prefer not to live in a financial world where you get your bones picked clean if you fail to read the fine print.” – Rob Carrick.
@Kurt
When it comes to financial products like mutual funds, I’m going to have to disagree with you.
I might put 10 K on a 29% credit card and pretty know it was wrong but eventually wake up and pay it down and lose relatively not that much money.
But if I sit across a deceitful mutual fund salesperson, who masquerades as a loosely self proclaimed “financial advisor” and has a nice Armani suit on in a nice office… It gives you the implied impression of “trust”.
A good portion of that industry deliberately hides their fee’s and costs. If you trust the wrong person, your not out a few grand like a credit card or car. Your out hundreds of thousands of dollars, depend on your amount invested and a 25-30 year timeline…
This is why this “profession” needs a hand slap and they need forced disclosure and transparency. They won’t do it themselves, and not everyone can understand investing. If you have 50 people in your office working around you, I dare you to find more then 5 that know anything about an ETF or a security or how to purchase a stock. Or to name their mutual fund their in and and what type of fund it is or name its biggest component.
You can’t compare this industry to others. You need special non-greedy people helping others to invest not grease-balls.
This has to be one of the most irresponsibly written blogs I have ever seen. It is FULL on mis-information, clearly demonstrates a lack of research, and is obviously based on opinion more that anything else… which would be fine if they were not professing to be giving consumers sound financial advise.
Not only the above, but in some of the posts on this site I have found items of advice that are blatantly in contradiction to regulatory requirements, laws and statutes.
You should be ashamed of yourselves.
@james
Instead of spewing generalizations, why don’t you explain your position? You know you can disagree and explain your thoughts. Your complaining that the posts are opinions, while at the same time you yourself are making statements with no basis behind them.
@James
This is one irresponsible and unfair comment. Rather than spitting venom, you could have shared your point of view backed up by research and facts that could be debated in a more civilized manner here.
You guys cool if I nuke this comment from James?
@Echo
Just leave it – it’s probably an “advisor” that got their nose out of joint because we are somehow stepping on their toes…
A nonsense comment like that only will solidify your points.
Good guess. It’s got “Advocis” written all over it.
I have to say that the premise of this blog is both naïve and untrue. To single out commission sales people as always having a conflict of interest when dealing with clients is just simply not true. If a sales person on commission in the financial industry gives bad advice they make less money than if their recommendations result in the client making substantial gains, so they have a vested interest in the success of their clients. The same holds true for any commission sales person. The client has to get value from the recommendations or the sales person will not be successful. The gains are shared in some kind of way.
If the sales person is paid a flat fee for their advice, they get paid the same amount even if their advice is bad and leads to the client losing money. They have no real vested interest in the client getting the best possible benefit because they get the same amount of money either way.
So you can see that there is more than one way to look at this.
In addition, I think that there is some dishonesty here because the people who run this blog make money when readers click on any of the links. That is a type of commission, and many readers don’t realize this. Where is the disclosure about this?
Whether a sales person makes their income on fees, commissions, or a combination of salary and bonus, it’s all the same. They are compensated for selling whether it be a service or a physical product.
I don’t think that it is fair or reasonable to pick on any type of commission sales person. There are bad ones in all sales professions as well as good ones. Really, why should I care about how a sales person is compensated as long as I get the benefit that I’m looking for!!
Commission sales people seem to be easy targets for criticism, but the good ones provide true value, just like any other professional, and the bad ones are a blight on society, just like any other person who is unethical and deceitful.
The world needs sales people, and it’s up to us the consumer to find the good ones.
@Jim
First I would like to thank you for making a post stating an opposing view. I am going to disagree with you and explain why. You have to first look at this from the client’s perspective.
To your first point, how does the average person find a good advisor vs a bad one? 9/10 people would have no answer to this. How do you explain the advisor that puts clients in a front load, high fee, and rear load fund that under-performs similar funds or ETF’s that have same returns that are no load and have much lower fees?
Lets take a bank advisor for example (I have actual real life experiences here by the way). Again most people would not know the difference between an advisor in a bank office from the best advisor in Canada. At a bank a person can be trained to sell mutual funds with the most minimal of training and tests. Like a robot they qualify a client with a 10 question form and assess their risk. Based solely on that, they make fund choices for the clients and will also most likely direct them into one of their in-house funds. Is that in a clients best interests ? I think not.
I also disagree with your next point. A fee only planner usually has a yearly flat fee. Say it’s $1200.00 for the year ($100 a month) If a person has $500,000.00 invested in 1.8% mutual funds (avg cost) that cost the client $9000.00 per year. So there IS a big difference there, especially if the funds don’t even outperform the indexes… Secondly there is just as much an incentive (if not more) for a fee only planner to do well. That person wants to keep their clients and get more in the future. Good performance and client interaction will create more future clients.
What does the click ad comment have to do with anything? The authors of this blog created a blog, when it got popular, the ad people came to them and pay them a small amount for ad-space. You can click on the ads if you want to. Or you can ignore them. Unless the blog is wildly popular click ad revenue is very small.
To reply to your last few paragraphs, don’t get me wrong here, we aren’t attacking “commissioned salespeople” in general – or every advisor. We are attacking the overall costs associated with some types of investment practices. There has to be a heck of a lot of “added value” given by an advisor to warrant a $10,000.00 yearly hidden MER cost for what most people can easily duplicate with for example, Vanguard or Blackrock products for a fraction of the cost. In most instances I just can’t see that added value.
As above with these financial products, it can’t be left to the consumer. You can’t compare a one time loss of a few thousand dollars buying a car vs a lifetime of losing $330,000.00 to fees on a million dollar portfolio… It’s not the same thing. Sadly I don’t even think most advisor’s themselves even get this… No one is entitled to steal $330,000 from anyone.