How to earn more by taking lower commissionArticle added by Larry Klein on August 15, 2014
Larry Klein

Larry Klein

Walnut Creek, CA

Joined: May 08, 2014

We've all heard the cliche that a great advisor will put his prospects' and clients' interest first. However, the proof of that platitude is apparent when you recommend to your client the very best alternative you can, even when that alternative pays you less money.

I can think of two instances where I successfully used this concept to not only do what was best for my client, but also to earn more in the long run. Although trite, what goes around comes around.

Early in my career as a financial advisor, I became enamored with individual bonds and individual preferred stocks. I noticed that most other advisors (if they can be called that) sold mutual funds of bonds or preferred shares. However, the moment you place preferred shares or bonds in the mutual fund, they lose their best feature — a terminal date. In the case of bonds, there is a maturity date; and in the case of preferred stocks, there are often call dates or conversion dates. The beauty of these dates is a known and specific dollar return. Once you place a collection of bonds or preferred shares in a fund, you lose that benefit.

I was earning 2 percent commission selling preferred shares and bonds while my colleagues were earning 4 percent and 5 percent on bond funds. However, as interest rates came down over the last 30 years, my clients' bonds and preferred shares got called and I reinvested the same money several times for them. Of course, these clients always came back to me because they received exactly what was promised — a fixed rate of interest and a known return of principal. My fund-selling colleagues could offer neither benefit. In fact, their clients were upset because they experienced their fund dividend being reduced again and again.

When index annuities were first offered, they were all the rage. However, for many of my older clients I steered away from them and remember selling the lowest-commission product offered by an insurer, which was an eight-year annuity with a 7 percent guarantee for the entire term. My clients loved me more and more as interest rates declined and their 7 percent looked better and better with the passage of time. At the end of the annuity term, they wouldn't think of going to anybody else for their next investment.

So when we think of this notion of being client-centered or client-focused, I think the best proof might be to ask if we are willing to accept lower pay to do better for the client. All too often in the insurance industry, commissions are placed ahead of the client's best interest. I surmise that by flipping through the industry magazines and noticing that insurance companies or insurance wholesalers trumpet products with high commission rates in their ads. These high rates seem to be the main selling feature marketed to agents.

See also: Compliance and clients' best interests: a lesson for the ages

So much of what works best in life and in business obeys the law of the paradox — the opposite of what looks to be the obvious course of action works best. In my experience, taking lower commissions earned me more in the long run, more loyal clients and more referrals.
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