On Incentive Structure

According to a BMO study that over 40% of first time Canadian home buyers can’t afford to buy a piece of real estate without getting some help from their parents. Naturally, online community started discussing the various factors of our current economic condition that could cause this problem, also how this will affect home owners and investors.

One person pointed out that home ownership isn't for everyone, but that was soon retorted by another user who claimed to the effect that a real estate agent said it’s the best investment one can make, and since real estate agents are not dirty stock brokers, there’s no reason for them to lie. He was not sarcastic about that either, or so I think. Yikes, it seems like stock brokers are getting pretty bad reputations.

To which I quickly followed up, stating that real estate agents, with their commission based fee structure, want you to purchase real estate no matter you profit or not. And with a percentage based commission structure, real estate agents don’t necessarily care if you can afford the place or not, they want you to buy the most expensive one, so they can pocket more commission.

In this regard, real estate agents take more money than stock brokers. Stock brokers earn commissions based on equity exchanging hands, and real estate agents earn commissions based on the price of the house, regardless of how much equity you put into the investment.

At the end I realized, that in today’s information super highway, professionals working for commissions are under heavy scrutiny in today’s consumer culture. Consumers are going to gather as much information as they can online, and try to maneuver around these professionals. Jobs such as non-fiduciary financial advisers, car salespeople, real estate agents, recruiters, and any other commission based jobs are going to provide exceptional value for their service, and prove that they are acting in the best interest of their clients and customers.

Gone are the days where a car salesperson pushing the customers to buy the priciest cars. Glengarry Glen Ross’ Always Be Closing is an outdated mentality. Savvy consumers today will be able to sniff out anyone who’s prioritizing his own interest above the customer. The new generation of best car salespeople are going to have to figure out what the client need, and cater to that need, instead of pushing for a close.

This is caused by the increasingly amount of available information for consumers, thus rendering the sellers unable to arbitrage on the information imbalance.

I’m not claiming that commission based jobs are going to be gone, but these professionals have to ask more questions and listen more and present services that aligns with their clients’ interests. Even if it means they might have to earn less on a specific deal.

Financial advisers should no longer push the financial products where they can earn the most commission. Instead they should understand the client’s risk tolerance, expected return, financial goals, time horizon, and present them with a unique and personal portfolio. This is why the industry of robo-advisers such as Wealthfront, Schwab, Wealthsimple, etc. are quickly rising. Though it is far from a unique portfolio, investors can tailor their risk level and get at least expected market return.

Car salespeople will have to start asking their customers about their budget, their driving habit, their lifestyle, and provide them with the car that’s going to fit into that lifestyle.

This is the new economical and retail Modus Operandi, and commission structure is going to face increasing amount of challenges, competitions, and consumer scrutiny.

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