3 Things to Understand About What Motivates Your Rep - Spicer Capital

3 Things to Understand About What Motivates Your Rep

How does your financial rep stack up? 3 things you need to know.

Last week, I shared an infographic cautioning unsuspecting investors and savers on the risks of working with a commission-based financial representative. I offered three questions to ask your financial representative – and, more importantly, to ask yourself.

Today, I want to give you further insight into the nature of this industry, so you can be fully prepared to ask some tough questions when interviewing potential reps.

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1. Understand the Standards that Bind Your Rep

What is a fiduciary?

As defined by Merriam-Webster, a fiduciary is:

One often in a position of authority who obligates himself or herself to act on behalf​ of another (as in managing money or property) and assumes a duty to act in good faith and with care, candor, and loyalty in fulfilling the obligation.

A fiduciary financial advisor is beholden to you.

From Fidelity’s website:

Investors often don't realize that most financial advisers are stockbrokers, and stockbrokers are not necessarily fiduciaries. Fiduciaries are required to look after the best interests of their clients over their own profit. Stockbrokers are not obligated to look after your best interests.

Most representatives of major broker-dealers are not fiduciaries; they simply have to provide “suitable” recommendations.

Merriam-Webster defines suitable as “adapted to a use or purpose.” The question here is, whose purpose does your rep serve?

When faced with two products – one clearly better for the client and the other with a substantially higher payout – the rep can legally choose the latter, provided he or she can justify it as “adaptable” to the client’s purpose.

In fact, contractually, these reps are more beholden to their firms than to their clients!

Contractually, commissioned reps are more beholden to their firms than to their clients!

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Proposed Changes in the Law

The Department of Labor (DOL) proposed a solution to this dilemma: it would make all financial professionals fiduciaries. The DOL Fiduciary Rule, proposed in April, 2016, is scheduled to be phased between April 10, 2017 – January 1, 2018.

In a telling response, several organizations filed lawsuits against the DOL for this action. They know that being forced to act as a fiduciary would mean dramatic income reductions for individual producers and many larger firms.

A law to reverse this change made it through the Republican House and Democratic Senate. President Obama promptly vetoed it.

Given that both houses of Congress and the Oval Office are now Republican, could a similar law make it through again before the final changes go into effect in 2017? Or perhaps it will just get stripped down through line-item vetoes, leaving the problem relatively unchanged?

What the new law would mean

If the law goes into effect, 100,000+ financial representatives used to operating under suitability requirements would then be held to a fiduciary standard. Enforcement of these changes would require an army of regulators and substantial additional funding.

Or maybe, after everyone calmed down, there would simply be more paperwork for reps to fly through with their clients as they blame the government for the inconvenience.

Regardless of the outcome, legally forcing a financial professional to become a fiduciary might help better protect consumers, but it wouldn’t be foolproof.

There is no substitute for financial prudence and investment savvy.

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2. Understand the Nature of the Industry

It’s an incentivized world

Large insurance corporations understand sales. They know what products make them the most money. They know what motivates their ambitious workforce. They manipulate that competitive drive to boost their bottom line.

Quantifiable metrics drive commission-based businesses. These include weekly and monthly standards, i.e., call 100 leads, have 40 closes, recommend 25 products. They also include goals set by superiors and by the reps themselves.

Often, these goals are paired with incentives.

  • All-inclusive vacation packages
  • Onstage recognition in front of 10,000+ peers at national conferences
  • Additional perks and compensation

Consider the pressure:

It’s the last day of a company-wide contest. An email with images of a luxury resort goes to the reps who are only a few sales away from qualifying. “Scour your inventory, find those elusive cases, close them, and all this could be yours!”

You, Mr. or Mrs. Client, would not know all this. But if you did, wouldn’t you rather reschedule?

Commissions and fees can be elevated and obscure

Fees. Investment vehicles can be riddled with fees, as well. These annual charges can destroy an investment’s long-term return.

Unfortunately, not understanding the nuances can, over your lifetime, cost you a relative fortune.

My former firm offered a Specialty Investment Vehicle that came with a complex management structure involving the oversight of multiple entities. The setup sounded fancy and as though it should produce elevated returns. That complex, fancy vehicle came with a substantial price tag – over 2.5% annually for smaller accounts. These fees ate into the returns of many an unsuspecting investor. It took me several years before I fully understood the impact these fees were having on the client’s bottom-line (more on this in a future post).

Unfortunately, not understanding the nuances can, over your lifetime, cost you a relative fortune.

Many financial representatives do not fully understand their fees, let alone their destructive potential, which can lead to poor recommendations on the client’s behalf.

Commissions. Here’s a true story to illustrate the nature of the industry. Watching the following happen without stepping in is one of my biggest regrets from my time as a commission-based planner.

Early in my career, a client recommended I help his surgeon friend. I was afraid his situation would be too complex, so I brought along a companion who had “experience working with doctors.” I listened silently and uncomfortably as this senior representative made recommendations with which I did not agree.

He recommended solutions that would cost this physician and his wife more than four times what he and I had previously discussed. He expertly navigated their objections and concerns and rushed through the paperwork.

He had found a way to hit his quotas at the expense of this trusting elderly couple.

3. Understand How to Protect Yourself

As a commission-based rep, I was trained to say, “I don’t make money unless I do a good job.” If you didn’t have a need, no problem – I would tell you how great you were doing. Hopefully, if I served you well enough, you would refer someone else to me.

Harmless.

“But really, though… how do you make money?”

I met with more than 1,000 people as a commission-based planner, and no one ever even tried to get past my canned rhetoric. Be ready to persevere to get the information you need to be able to identify potential conflicts of interest and consider their effect on the rep’s recommendations.

First, do your homework

Have a good idea of your options before you meet with a financial rep. Then you’ll know if he or she does not present you a full range of options, and you can ask why.

  • Two credible websites at which you can learn about the basic options are:
  • If something doesn’t make sense to you (that the rep said or online), seek a second opinion. There are plenty of people educated on financial subjects who are willing to address your concerns for free.

If something a financial rep said doesn’t make sense to you, seek a second opinion.

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Then, be ready to ask the rep pointed questions

  • “What do I have to buy, or where do I have to invest, for you to get paid?”
  • “Are these all the options you can offer me?”
  • “How do the commissions for all these different options compare or influence your recommendations to me?”
  • “Are there any options I have that you cannot represent?”

It’s likely your rep gets a cut from any insurance product the moment you pay for it. Commissions range from around 50% to over 100% of a year’s premium. That means that for some products, in Year 1, 100% or more of what you pay goes to your rep.

I am not necessarily suggesting this compensation is undeserved. My point is, the fact that multiple companies are paying different commission rates and offering different perks to an individual rep has obvious potential to sway his advice. Additionally, these fat commissions incentivize reps to push more insurance, resulting in over-insured clients.

What This All Means For You...

It is disheartening to think of the number of financial professionals who operate like that senior representative selling to the elder couple. Their ability to convincingly spew intelligent-sounding, yet wholly inaccurate information is frightening.

Even well-intentioned reps can be misguided or ill-informed, as I was. The truth is, the responsibility lies with you. Be an educated consumer, and don’t be afraid to ask as many tough questions as you need to assure yourself you understand all the parameters and consequences of your financial plan.

A parting thought

Be careful who you trust. If something doesn’t feel quite right, it probably isn’t.

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Let me know your thoughts


  • Any horror stories to share (either as a consumer or as a “reformed” advisor)?
  • Do you see it another way? I’d love to hear the other side!
  • What additional advice can you share that might help others?

Stephen Spicer

Stephen Spicer, CFP®, AEP®, CLU® is the founder and managing director of Spicer Capital, LLC. He is married to his high school sweetheart, and they have three amazing boys.

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