In all industries, no matter what product or service we’re looking for, we prefer to do business with people we know, like, and trust. The person or company who has our trust will win out every time over the person or company who doesn’t. Why is this the case? Trust is everything and is the very foundation of economic exchange. If I can’t trust that you will uphold your end of the bargain, I’m not going to part with my money. Vice versa, if you can’t trust me that I’m actually going to pay, you aren’t going to give me what I want.
We’ve all run into situations where we feel like companies and their salespeople have betrayed our trust. When salespeople or company representatives cheat us in some way, does that mean that they are bad people? Does that mean those salespeople are evil? Well, every situation is unique. I’m sure there are some salespeople out there who simply lack integrity and will do anything for a buck. But, for the most part, I don’t think these representatives are bad people; I just think they face the wrong incentives.
Most salespeople make some form of commission–they earn a percentage of the profit from each sale they make. From the perspective of their employers, this compensation structure makes sense. It produces the right incentives in the salespeople to focus on closing deals. If their income is dependent on making sales, they will push harder to get people to buy the high-margin products and services. It’s a perfect system–for the company selling those products and services.
For the customers of these salespeople, however, commission is not the best compensation structure. In fact, I would argue that it is the worst. Commission erodes trust between buyer and seller. The representative making the commission always has the incentive to steer his or her customers toward a product or service on which the representative can make the higher commission. When the customer knows this, they can’t trust anything the representative says. When the customers aren’t aware that the salesperson is making commission, they will feel betrayed and cheated when they eventually find out. Commission is a trust killer.
Take one industry, for example–the automotive industry. Why don’t people generally trust car salespeople? Among other things, it’s because they know the salespeople will try to get them to buy a specific car. Why does the salesperson do this? The reason is he or she makes more money off the commission on that car than they do off the commission on others. The salesperson has his or her own best interest at heart–not the customer’s.
In the world of investing, there are countless financial advisors who make commission off of their clients. I don’t think these advisors are bad people, for the most part. I just think they’re stuck in the wrong system. Commission forces them to ignore the interests of their customers and look out only for themselves. So, as you are looking to become a better investor, be careful who you choose to do business with. They may not be as trustworthy as they seem.
If you’re looking into different options in your investing strategy, feel free to reach out to us for a free consultation. We would love to help you go in whatever direction you need to go to get you the best results possible. And, for the record, we do not charge commission. As much as is possible, we want to have your best interests at heart.