Wednesday, July 23, 2008

Stretch your dollar series: Commission Rebates

THIS POST IS GOING TO GET AGENTS REALLY MAD. Apologies in advance!

Many car and insurance salesman argued that (prospective) clients should not request for a commission rebate. It is unfair to request a portion of one’s salary when they work for you. Sounds correct?

In a way, yes. But in my way, NO.

I personally have experience buying insurance and cars. I too ask for commission rebates in CASH, rather than vouchers, sports rims, solar film, sound proofing and other non-cash items.

Am I being unfair to them? After all, they derive their main income from their sale of cars and insurance. Essentially, customers who buy from them, pay them their salary. If everyone were to request rebates from them, they might end up robbing the banks to make ends meet. (Thus some unscrupulous agents resort to just robbing you, if you know what I mean).

Customers who purchase the cars or policies also exercise authority, decisions (to purchase) based on the recommendations/ advice of the sales agent. WOW, sounds like my boss.

My boss decides my salary. If I am not willing to do the job at his stipulated salary, someone else would. By the same token, if the sales agent is not willing to give me cash rebates to make my purchase cheaper, I will look for someone else. Somebody out there wanting to make just a little from my sales is more than willing to give me a $1,000 rebate for my car purchase; a 40% rebate on my life policy.

Wait wait. Will they starve? Let’s take a look at one car agent’s and one insurance agent’s sales commission. The below illustrations were given by my agents:

Car Agent Rob working in Brother Motors, sells 15 cars per month.

Basic pay: $500 monthly

Commission for selling a normal sedan: $500

Insurance: 12% of motor insurance

Loan: 0.5%-2% of loan amount, depending on loan amount and tenure.

Trade-in vehicle: Depending on make, modal, age: $0-$1000.

John bought a car from Rob, trading in his 3 year old car for a new one.

His insurance premium is $1500 and his loan tenure is $50,000 for 7 years.

Rob earns: $500 (Bro Co. commission) + $180 (insurance commission) + $ 1% of $50,000+ $200 (trade in car commission) = $1380.

How accurate is the figure? Rob is my university classmate. I am quite sure he did not lie to me. The figure should at least 80% correct. It can be less, but it can be MORE as well.

How much did Rob gave John in cash rebate? John asked for $1,000 cash back and he gave him, happily.

Why?

Even earning $380 per car will yield him $5,700 monthly before his basic salary. The paperwork he has to do is simple.

In reality, only 30% of his customers “squeeze” him. Most of them are just happy with few hundred dollars worth of paint protection, rims or solar film.

No wonder he has 2 condominiums.

From John’s and my perspective, we choose the person who can lower our purchase price to the minimum, stretching our hard earned dollar.

As for commissioned insurance agents, selling a life policy will yield them 50% of premium paid for the first year (assuming a traditional whole life). My policy cost me $3000 annually. A rebate of $1,500 was given to me.

Why?

This is because for the 2nd, 3rd and up to the 6th year, the agent will still able to derive a percentage of your premium as his income. If I am not wrong, it goes something like this:
Year 1: 50% (of premium)
Year 2: 30%
Year 3; 20%
Year 4: 10%
Year 5: 6%
Year 6: 5%

Again, the figure might not be 100% accurate, but it is at least 70% correct. ILPs also allocate a similar percentage of premiums (as commission) to the financial advisor. No prizes to guess why agents are pushing such products aggressively.

My agent earned nothing for Year 1, but for the next 5 years, he has a recurring income from my policy. My agent, a primary school friend, earns $8,000 a month.

My car and insurance agent will not starve at all. In fact, I am more likely to starve than they are!

The point I am coming from is not to say that since they earn a high salary, hence we should get something back from them. My point is both parties should aspire to be in a win-win situation. I choose the product and pay the price I want.

Of course there are intangible benefits like sales and customer service. However for me, I rarely look beyond dollars and cents when it comes to purchasing commercial products.

Disclaimer: The purpose of writing this entry is not to encourage prospective clients to ask for cash rebates. You should work something out with your agent to acheive a win-win situation. The figures illustrated may not be 100% accurate.

8 comments:

Anonymous said...

There is a small problem. Let's say the client signs up an ILP policy, asks for a comm rebate and gets it. Within 3 mths, he surrenders policy. Net loss to adviser is the comm rebate that he gave, because the insurer will get back the full commission from the adviser...

Private Investor said...

If we squeeze the agent, will the agent wants to service us if we need to make a claim?

Sgbluechip said...

Hi anoymous, I am assuming the premium is paid yearly. It makes better sense to pay premiums annually as it is cheaper this way, enhancing a lot more savings in the long run.

Sgbluechip said...

Hi private investor, how often does your agent contact you after he earns the commission? Well, mostly when he wants to introduce you another product, he will call you, is that right?

How many agents switch companies, become IFAs, resign in a span of 10-18 years? Your policy will be passed around like a football because there is no more comission paid to the advisor taking over it.

If the advisor does not service you when you make a claim, you have plenty of avenues to seek help and get the claim done.

The agent can run, the company can't.

Anonymous said...

sgbluechip:

i don't understand what you're saying. My point is that the adviser has to be very certain that the client won't give up the policy anytime soon, before the adviser can give any rebate.

just to add on, such an arrangement is illegal with most CPF transactions, though there is a legal way of getting a small rebate.

Sgbluechip said...

I am speaking from a client perspective. The agent have to take the risk to give rebates and again face the risk of client giving up the policy. However, from my understanding, the first 2 years of WL policy does not have any cash value. Which means I will get nothing if I terminate the policy within the first 2 years due to high distribution costs. I do not think the insurance company will pro-rate and rebate any premiums if I were to terminate it after 14 days. Do correct me if I am wrong.

It is illegal for the agent to do that for CPF funds. However for cash, I do not think the client is subjected to legal liabilities. The agent might lose his license if the matter is uncovered though. Again, the agent takes the risk here.

Anonymous said...

Yes, you will get nothing if you terminate early. But some people still do it if they figure they have better use for their money in future than to continue paying their WL and ILP premiums. If the agent isn't already your friend and know nothing about your character, why would he/she give you any rebate and take the risk?

You were lamenting on how no agent wanted to meet up with you to sell a cheap term policy. And that most were interested in pushing high comm WL and ILP. The successful agent example in this blog post is about the greedy agent instead of the not so well off one who is willing to sell you a term policy only? Why? Isn't the $8000/mth agent the type of product pushing agent that every DIY investor condemns, and a DIY investor like youself still encourage people to give him/her business?

If someone like Adrian (http://akhiat.blogspot.com/) is going to meet you to sell you a cheap term and h&s, I bet you're not going to take it up anyway since he's not doing as well as the 8000/mth example you quoted and can't give a rebate.

Sgbluechip said...

Some clarifications on the above comment:

An agent who earns $8000, $80,000 or $800 a month does not indicate whether he is a greedy, hardworking or smart agent. My agent used to be a hardworking man working 16 hours per day. He gave rebates because he believed he will be in the industry for at least the next 10 years and word of mouth has an exponential effect on his sales income. He has resigned now and is teaching piano for a living instead. I bought the WL policy from him 7 years ago.

A H&S policy's premium will not pay the agent a decent meal, why will I want Adrian to give me a rebate? Again, how much the agent earns monthly is not a factor of how much I ask for a rebate. Rather simply, I am just a consumer looking to buy a product at a lower price. If I need to buy a product for $50 and I know $25 is the cost price, logically I will want to bargain it to as low as $25, right?

Of course I know what I want in the first place, so the agent does not waste precious time explaining things or doing financial planning for me.

I hope it clears anonymous's doubts!

I do apologise again if this post made insurance agents upset. This is just my perspective on stretching my dollars and my honest experience and opinion.

Also, I should have indicated the primary school friend agent had resigned. $8000/mth 7 years ago was a good pay cheque. Adjusting for inflation, it can be almost $10,000 monthly in today's dollars. For a young poly graduate at that time, it is awesome right?