Solid Advice: ALWAYS Question Commissioned Salesmen!

I remember being told during broker training for PaineWebber (now UBS) that if a prospect asked about fees or commissions that I was to basically show them the door. PaineWebber’s stance was that clients who bickered about fees weren’t going to be good clients. Of course there will always be people who want to get something for nothing. Those people do make poor clients because they simply don’t respect the work that the advisor does.

However, I have to totally disagree with PaineWebber’s stance. I think it is very important for clients to know how much they are being charged and HOW they are being charged, especially if commissions are involved. Why? Because there can be a huge conflict-of-interest involved when a broker recommends one product over another. Kirk, a fee-only financial planner and blogger, illustrates this point as it regards to the subprime mess.

It’s unfortunate that people can’t simply trust that their advisor is going to do what’s best for them. But, that’s the way it is.

Here’s a few questions I would ask as it pertains to hiring a financial advisor (there are more, I’m sure. These are the few I could think of off the top of my head):

1. How will you get paid for your advice?

2. How MUCH will you get paid for your advice?

3. Are there cheaper viable alternatives to the products you are recommending?

4. What share class are you suggesting I invest in? – Although I think it is somewhat rare these days, some brokers will claim that B and C share mutual funds are no-load. That’s a lie.

5. What are the ongoing fees associated with this product? How much will it cost me per year?

6. How can I be sure that you won’t forget about me after you have made the sale and have collected your commissions?

7. Is there a surrender period for this product? If so, how long is it, and how much is it?

If you are talking to a mortgage broker, you might want to ask:

1. What was my credit score? – I think you should know this information BEFORE you go and talk to a banker or mortgage broker. If they give you a number that is significantly below the number you obtained, call them on it.

2. Is this the best product for my needs? What alternatives do I have?

3. Is this considered a subprime loan? – if the rate is significantly higher or lower than 30-year fixed rates, let it be a warning sign. If it is lower, it’s probably a teaser rate, which will go up in the future.

4. How much are you getting paid for this loan?

5. Does your commission depend on the type of loan you sell me?

6. Who is the lender behind this loan?

Like I said earlier in the post, these are a few questions I could think of off the top of my head. Here’s a more extensive list from the SEC.

9 thoughts on “Solid Advice: ALWAYS Question Commissioned Salesmen!”

  1. This goes for all commission based sales people. As nice as people can be, everyone has bills to pay and will put their well being ahead of yours for the most part. If they are pressured to sell a specific product, either directly by a manager or by setting the commissions or spiff way higher on one type of product or another, then they will probably do it.

    It would be nice if all sales people were flat salary positions so we wouldn’t have to worry about it, but then businesses would lose money because their sales people wouldn’t need to actually sell to get paid. They could do salary + a quote, but quotas have the same effect as commission.

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  3. I compare this to a construction company contracted out to complete a public works project. If you pay them based on time worked, they will lengthen the project and probably not do a great job. If you pay them based on completion, they will hurriedly complete the project and not do a good job.

    The solution is when you pay based on both completion and time worked, but at a point where you can ensure a complete job at a lower price.

  4. Amen. I really don’t trust people who work on commissions, because…well, I don’t trust people, but I expect people who earn a flat fee to have less incentive to steer me towards expensive things.

  5. Having worked as a 100% commission mortgage broker, I would have to say that I agree with these questions 100%. If more people were aware and asked things like this, it would actually have made my job *easier*, because the shady dealers would have been called out much sooner in the process.
    Then the honest brokers and salesmen would be able to compete based on product and value added, rather than just being smooth talkers.

    Sometimes a flat fee or salary can actually be counter to the customer’s interests. As Mrs. Micah mentioned, people earning a flat fee have less incentive to steer you towards expensive things. But they also have less incentive to know about the full range of products, and why those expensive things cost more. If the total cost of ownership is actually lower for the premium product, or if it has other features that make it better suited to what you are going to use it for, isn’t it actually beneficial for you if the salesperson knows this and steers you towards that “expensive thing”?

    I know that if I make the same $100 whether I sell the basic widget or the deluxe widget, I will always sell the basic, because “it’s cheaper”. But if I make $200 for the deluxe, I will know exactly what it offers and why it would benefit you. If you don’t need that, you get the basic and go away happy. If you do though, you’ll appreciate that the higher price (and higher commission) is worth it to you.

    So by all means, ask the tough questions. Ask what I’m getting paid. But if the answers are satisfactory, don’t hold it against me just because I get paid for selling.

  6. Even better, always question everyone. Once you stop asking questions, you stop learning and open yourself up to being taken advantage of. At least with commissioned salesmen, you KNOW who they’re looking out for. With someone you don’t know, you have no idea where their loyalties lie…

  7. There’s an upside and a downside to everything. When I recently used a commission-based mortgage broker, the mortgage was actually picked on my criteria (lowest total cost over 2 years) even though that meant that he had to go through and do the calculations by hand.

    The amount of commission was disclosed as a routine matter – I wonder whether it might be a requirement of our UK regulators (the FSA).

    I probably won’t use a full-price mortgage broker again, but that’s because I’m more sure about what I’m doing.

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