Commission salespeople often get a bad rap for being pushy, evasive and even plain deceptive. However, the biggest problem is often that consumers are unaware about how or why they're being worked over. Commission salespeople may have an ethical responsibility to their clients, but they also have plenty of incentive to act in their own best interests – and many of them will. Therefore, it's up to consumers to make sure they get the best from the salespeople they encounter.
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They key for customers is to know when they are dealing with a commission salesperson who may or may not have their best interest in mind. There are many highly professional commission salespeople out there, but consumers need to approach these relationships with care and be aware of the possible conflicts of interest that commission sales can create. Here we examine conflicts of interest for some of the most common commission sales people you're likely to deal with.
1. Bank Salespeople/Advisors
Most people assume that the agents who help them purchase financial products at the bank are there to help them make the best possible financial decisions. Unfortunately, this is not always the case. This problem became abundantly clear during the mortgage meltdown, which occurred partly as a result of the large number of subprime mortgages that had been sold to unwitting buyers. Many banks were providing incentives to employees for pushing these higher risk products to borrowers and, for those who ended up defaulting on their loans and losing their homes as a result of rising interest rates, these products certainly weren't in their best interest. (Learn more about how this happened in Who Is To Blame For The Subprime Crisis?)
If a bank representative is trying to sell you on a particular product, take a careful look at why he or she is so keen on it. It could be that the product really is the right product to meet your needs, but it may also be true that the professional receives an incentive for selling it to you. If you suspect this, it doesn't hurt to ask! And always be sure to ask about other options – if the banker isn't interested in giving you a full range of options, you should find someone who will.
2. Real Estate Agents
Real estate agents, or realtors, are another example of a commission salesperson that everyone loves to hate. The reason for this is that agents tend to make a large sum on a single transaction that sometimes requires little effort. This is because realtors usually set up a commission agreement with buyers or sellers before the transaction occurs. However, just because the deal is done quickly, doesn't mean the realtor has scammed you. It could be that he or she has priced and advertised your home appropriately, which is part of the job.
That said, a quicker deal is in many ways desirable for a realtor. This means realtors may have interests that conflict with those of their clients, particularly buyers. This can lead to tactics such as pressuring a seller to take a lowball offer. Realtors generally make commission based on a percentage of the price of the home being bought and sold. The issue is not so much that they drive up the price, but that they rush a sale. This is because a $10,000 change in the price of a $300,000 home will not make much of a dent in a 3% commission. Conversely, this is generally a significant sum for a buyer or seller.
An unscrupulous realtor may also attempt to get a buyer to purchase one of the realtors own listings. This is because half the commission in every transaction is split between the buyer's and seller's realtor. If one realtor can act as both parties, he or she can "double-end" the commission.
If you have a good understanding of real estate transactions you can always negotiate with your realtor on commission. In addition, realtors who go the extra mile for their clients also tend to expand their business through word of mouth, so you may be able to have a friend refer you to a good realtor. (If you don't want to hire a real estate agent, you can always sell your home yourself. Learn more in 7 Things To Consider Before Selling Your Own Home.)
3. Car Salesman
Car salesman have a very bad rap. It is generally believed that, in most cases, they will do everything they can to get buyers to spend more on a car. This is because car salesmen usually earn a percentage of the dealership's profit on a car as commission. Therefore, it's in their best interest to get you to pay as much as possible for a car.
However, if you recognize that it's also in their best interest to sell the car as long as there's still profit it the sale, you will be in a much better bargaining position. If you are willing to walk away from the deal, you have the clear upper hand. Arrive at a car dealership armed with knowledge about reasonable prices for the car you are considering and know your bottom line. Then you can strike the hard bargain by telling the salesperson what he or she will have to deliver to sell you the car. (For more tips on shopping for a new car, see New Wheels: Lease Or Buy?)
4. Insurance Salesman
Everyone needs to be insured to some degree. Insurance salespeople are often paid on commission, so they may be tempted to make you believe that you need much more insurance than you do. When it comes to selling insurance, the insurance company is counting on making money - so the transaction is not in your favor to begin with.
If the consequences of not being insured for a particular circumstance are minor or tolerable, consider going uninsured. Many pushy insurance salespeople prey on your fear, compelling you to insure against remote chances for which money would provide small comfort. For example, there are insurance policies that compensate parents in case one of their children should die even though the loss of a child is rarely damaging in a financial sense because children do not usually add to family income. There is, however, an immense emotional cost that money can't soothe. While a policy payout would certainly provide grieving parents with time to deal with their loss, it's not possible to insure yourself for every catastrophe life might throw at you. Pay yourself a premium into an emergency fund instead. This way, you can prepare for the worst and, if it never happens, keep the cash. (For more insight, see 15 Insurance Policies You Don't Need.)
5. Stock Brokers
Brokers can be paid by flat fee or commission, and both methods have their drawbacks. For commission brokers, there is a risk that the broker will trade excessively in your account to increase the number of transactions and the commissions these transactions generate. This is called churning. A broker may also be provided with incentives for pushing certain stocks or bonds to clients. Ethics dictate that a broker shouldn't sell these investments when they aren't appropriate for a particular investor. Of course, some brokers will be swayed by the conflict of interest they face. You can avoid problems with a commission broker by being well informed, monitoring your account carefully and asking plenty of questions when your broker advocates for a particular investment. (For more insight, see Is Your Broker Acting In Your Best Interest.)
Commission sales have benefits for consumers in terms of the level of attention you are likely to receive from salespeople. However, you must be aware of a salesperson's possible motives and avoid taking them at their word.
If you're still feeling uninformed, check out last week's business highlights in Water Cooler Finance: Auto Hope, Bubbling Oil and Obamanomics.