Once upon a time there was an insurance intermediary company that employed couple of hundred insurance brokers. Life was good. The brokers were meeting their clients, identifying their needs, and advising them on which insurance policies to use for their situations. They were happy, clients were happy.
But then something happened. The insurance company whose products they were selling, created a new product. A whole life insurance policy where a part of your monthly payment goes towards insurance and a part towards investment in mutual funds.
And there was something very interesting about this product, that made quite a stir with all the brokers. The sales commissions they would get when they sold this product were 3 times higher compared to any other product.
The human nature quickly took hold and in a period of one month all the brokers were focused on selling this product. After all, who wouldn’t grab a carrot like this!
All of a sudden this product became a solution for almost all the needs of their customers. So the typical sales approach was: “Customer, for any problem you might have, we will sell you this product. It’s the best and the only option. So just buy it now! Resistance is futile!” And it sold really well because brokers were very motivated to sell it. A big payout was just around the corner for them.
The CEO of the company was ecstatic. He hasn’t seen profits like this for a long time. And when something sells well – why not give it additional kick.
So he did a sales competition. The broker who would sell the most policies in the next quarter would win a six months’ lease on a new Ferrari. If the brokers were very motivated before, they were on fire now.
Now all this would not be so bad if the product was a good product for the customers. But the reality was, that this product is one of the worst financial products out there charging enormous commissions and fees.
In my upcoming book, The Million Dollar Decision, I talk about the 6 dark forces of investing. The second Dark Force of Investing that is responsible that most investors lose a very big part of their potential investing returns are the reward systems of most financial institutions. These reward systems can motivate their employees and partners to be biased, highly motivated to sell something that is not good for the customer and often even unethical or corrupt.
When employees sell high commission products, they make more money. And customers are left with less money. It’s that simple. The higher the commissions and fees, the worse off are the customers. I call this the Chain of Financial Ruin.
That is one of the most important reasons that makes the financial industry the most profitable industry. In the US it employs less than 5% of population but it produces more than 30% of all the corporate profits according to U.S. Bureau of Economic Analysis. Where does that profit come from? From customers, of course.
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