Commission-based sales have been in the news a lot lately.

From the banking royal commission to real estate disruptor Purple Bricks, there’s been discussion about the issues associated with the commission sales model compared with fee-for-service business models.

The argument for commission sales is that the sales person has a direct incentive to get the best outcome for their client. Whether it’s a loan approval, investment advice or the sale of a property, the mortgage broker, financial planner or real estate agent won’t earn anything (or certainly much less) if they don’t get an outcome for the customer.

So, what’s the issue?

Mortgage brokers and financial planners have been under the microscope for unprofessional, or in some cases, fraudulent behaviour to get their commissions. You see,to get the transaction over the line and trigger their fee, some providers can’t fight the temptation to cut corners. And the bigger the commission, the harder the sell and the bigger the temptation to be unprofessional.

In the property space, new industry entrant and disruptor, Purple Bricks, was fined recently for misleading advertising. They offer a fee-for-service (no commission) model to home sellers that’s much cheaper than commission-based real estate agents. But if your property doesn’t sell for some reason, their fee is still likely to be payable. Some customers have complained about this because they assumed that the fee for the service only kicks in if the property sells. Some would argue Purple Bricks are engaged to sell the property, rather than market it.

But that’s the key difference between the two business models.

Fee-for-service providers have an incentive to provide good service which should also result in the required outcome, whether it’s professional advice or the sale of an asset. Commission-based businesses can also provide good service, but the risks associated with getting good service seem to be higher.

To my mind, commission-based salespeople have a transactional approach to providing service. They will do what they need to do to get the transaction done. Too often that means cutting corners and can result in unprofessional behaviour.

There are endless examples of commission-based sales people exhibiting unprofessional behaviour to get their desired outcome. I stress “their” outcome because often they burn their client and/or the counterparty to get the deal signed. No surprise then that commission-based sales people have the lowest trust ratings.

Real estate sales, car sales, advertising sales, insurance brokers and politicians routinely finish at the bottom of the trusted professions list. Politicians don’t earn commissions, but they also exhibit transactional behaviour because they are so often focused on getting re-elected (their outcome) rather than acting in the best interests of their constituents.

commission

And what about Real Estate?

My recent business experience is in the property industry, so I’ve got a strong interest in how real estate sales people are paid and how this structure is being challenged. Commission-based agents argue that lower cost models like Purple Bricks can’t achieve the same sales outcomes for sellers because a lower fee must mean lower quality service, skills and expertise. But we regularly see “top” real estate agents resorting to short term, sharp business practices, particularly when there’s a risk the sale might fall over.

The real estate industry has recently announced that it is trying to improve professional standards and will more directly regulate and enforce those standards. Time will tell how well that system works in practice.

It’s important to the real estate industry that real estate agents are considered a profession. That term means high standards of professional ethics. However, my sense is that unprofessional behaviour is more widespread than the industry wants to acknowledge.

It’s not good enough to be professional most of the time. You are either professional all the time, or you are not a professional.

And if you stick with a commission-based earnings structure, there will always be a clash with being professional.

Best Regards,
Michael Ferrier

At EYEON Property Inspections, we help you buy and sell with more confidence.