09.21.07
Paying on Commission
Question: What do insurance representatives, financial advisers, mortgage brokers, and car salespeople all have in common?
Answer: They all directly profit if they can talk you into a bad deal.
Congress is in a tizzy over “deceptive practices” by mortgage brokers, but as usual they are missing the larger picture. The mortgage industry is only one of many dominated by commissions based directly on the profit generated from a deal. It is not unreasonable to reward a salesperson for drumming up business; those who are most successful at closing deals ought to benefit from their greater talent and efforts. Would you want to hire a real estate agent on salary, regardless of results? Yet there is a fine distinction between paying a commission based on the value of the deal and paying based on the profit of the deal. The latter encourages the representative to push customers into higher-margin products regardless of what best suits their needs. Read the rest of this entry »