How are salesmen steering your decisions?

I worked at Wells Fargo during their shameful years. Any garbage you heard about their slimy sales tactics are likely true. I had managers direct me to run credit card applications without telling the applicant (although I never did). I watched employees copy credit card info from our system to sign people up for credit monitoring subscriptions that we sold. The customers thought it was just an upfront $1 charge, rather than the actual $17/month subscription. I had 5 sales metrics to hit: Sales per day, profit per day, checking account package rate, loan volume, and partner referrals. How companies structure sales compensation is an imperfect science.

For sales tracking purposes, every product (credit card, checking account, bill pay, etc) had an assigned dollar amount of profit attached to it. I think my quota was to average $1,200/day in profit. While in a branch on a college campus, goals like profit per day could be tough to reach. Here’s why… The College Checking account was only worth like $25 profit. The College Credit Card was only worth another $35 profit. So if I opened a College Checking, savings, debit card, credit card, and online banking, I’d receive about $125 of profit. I’d need to open 10 of those bundles per day to reach my profit quota. That’s A LOT of accounts!

Although it was easy to keep the College Checking account free, I was incentivized to sell the Preferred Checking Account. This account had $150 profit on its own! Throw in a Money Market Savings and all the other junk, and I’m around $300 profit. I’d only need to open 4 of these bundles/day to reach my profit quota. I hated opening these accounts! They were a bad fit for 9 out of 10 students. I knew that in 3 months, they’d be coming back in to ask me to waive their $15/month service fee (plus $10 in their savings account) and likely ask if there was a way to make their account cheaper/easier to manage. One of the saddest parts was that students looked to us as someone to help them succeed financially, but we were incentivized (and threatened) into selling them products that could be damaging to their financial well-being. As a personal finance nerd, this really drove me crazy.

Later on, I received a promotion into a different branch. My new profit quotas were only attainable through bigger products like lines of credit, mortgage/refinance loans, and financial advisor referrals. From a corporate level, I was encouraged to focus on customers with those products or at least $100,000 with the bank. I no longer had a sales per day quota. One day my manager was tallying daily sales, because she was trying to make sure we were on pace to hit her goals. I told her I only had 2, but that I’d made 7 warm handoffs to my mortgage banker with customers eligible for a no cost refinance. She was disgusted and directed me to go man the drive-thru window to see if I could open some children’s savings accounts when I saw parents with children in the car. One refinanced mortgage was typically worth at least $1,200 profit for me (because that is real money for the bank). A child’s savings account was $10 profit. This was an extreme case of the manager’s goals not being aligned with the employee’s goals. Should I try to please my manager and get minor savings accounts? Or should I make my manager mad, try to hit my quotas/bonuses, and actually make the bank money?

Product Steering

These bank account upsells are great examples of product steering. As bankers, we were not paid to be fiduciaries, find products to fit customer needs, or advise about financial decisions. We were paid to sell products that would make the bank money.

We were also looking out for ourselves. It was clear that we were hired as salespeople. There’s an old saying that the best salespeople are coin-operated. Motivated by money, if you put a sizable commission in front of them, they’ll find a way to get it. They will focus on the activities/behavior that will get them the coin.

If a salesman is picking products for you and hesitant to explain all your options, suspect that they have something extra to gain from the specific products they’re picking. This happens all the time. If they don’t want to take the time to explain, just let them know you’re ready to walkout!

The Car Dealership

Before I went to the dealership to buy my last used car, I told the salesman I wanted the final price off the lot to be a certain number. I think we talked it down about $1,500. After test driving the car, we went to the sales desk, and I said we wanted to write a check and pay for the car in full. Salesman: “We can’t give you that price with a cash purchase. You’ll need to finance 100% of the purchase. It’ll be about $550 more if you want to pay cash. But you can pay off the loan after 3 payments if you want.” We weren’t surprised to hear this, but it was worth a try.

I’m a full-time real estate agent, and cash buyers almost always get a lower price. So why was cash no good at the car dealership? ANSWER – The dealership gets paid a commission by the banks or credit unions for selling me an auto loan. The conversation continued…

Me – What is the lowest interest rate available?

Salesman – 4%

Me – Do you work with Utah Community Credit Union? Because they have been advertising 2.99%.

Salesman – Yes, but they haven’t been good to work with, and I don’t think they are offering that promotion anymore. (Not true)

Me – Ok. I guess if I’m only making 3 payments on it, it’s not a big deal.

A few mins later…

Me – Do some credit unions pay a bigger commission than others?

Salesman – Yes. Some barely pay anything. Some are a lot more, but people don’t like having their loans there.

Me – So you said 4% was the lowest rate you could offer, why is mine 4.49%? I know we both have excellent credit and low debt ratios.

Salesman – You said you only planned on making 3 payments, so this bank will be the best for that.

SO MUCH TO LEARN HERE!

Takeaways

  1. Banks and credit unions pay commissions to car dealerships for selling loans to car buyers.
  2. By buying with a loan, the car dealership can offer lower purchase prices, because they receive extra compensation from the banks holding the loans.
  3. Banks can all pay different amounts of commissions to dealerships.
  4. Salesmen can make more money by selling you a loan from a bank that pays them a higher commission.
  5. The bank paying the highest commission likely won’t be the one offering the buyer the best interest rate or terms. This means the salesman is incentivized to steer you to a loan that’s better for them, but worse for you. Some of those low rates you see advertised may not even be available at the dealerships, because the banks have to pay higher sales commissions than they would in a branch.
  6. For the dealer to keep their loan commission, the car buyer must make a minimum number of loan payments. 3 payments in my case. If I paid off or defaulted on the loan before the 3rd payment, the bank would take back the commission they paid.

There were several opportunities and incentives for the salesman to put me in a bad product that got him the best commission, without considering what was in my best interest. For the most part, the average person has no idea these decisions are being made for them. Make sure you’re asking to ensure you get good loan terms.

I was happy with the price I received. I wanted the dealer to get their commission. So I opened the loan. My first payment was $20k, which meant a reduced amount of interest would be charged on my final 2 payments.

Conclusion

A good salesman will figure out the path of least resistance to get his/her commissions. Unfortunately, the financial services industry is littered with salesman trying to take your money, rather than helping you keep or grow your money. I love learning how people earn commissions. Make sure you’re asking enough questions, so you understand what salesmen or “advisers” are doing and why. Some will be considerate enough to help you find the products that are the best fit for you, but many will steer you to what is best for them and their pockets.

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