If We Want to be Respected as Advisors, We Need to Stop Being Paid Like Salespeople

The problem with this discussion is that both sides miss the larger issue. The true disconnect for the buyer in understanding, and thus demanding, representation dates back to the mid 90's when our boards and associations started asking us to shift from a sales role (move the product) to a fiduciary role (represent the client). While they asked us to change our role with the client, they failed to examine our traditional compensation model which by it's very nature sets up an inherent conflict of interest: how in the world can you act as a fiduciary and give truly objective counsel when you are being paid contingent on the client's actions that you're advising them on?

Commissions make total sense for a salesperson, whose only responsibility is to sell the product. But, if we are expected (and in fact according to NAR's code of ethics, required) to put the client's needs above all others, including and most especially our own, then WHY haven't we shifted our compensation to mirror how other fiduciaries are paid?

Think about it: auto salespeople are paid by commission which makes sense given their role: while we hope that they will deal with us honestly and not misrepresent their products, we don't ask them to represent us. We understand that their loyalty is to their dealership and themselves, not to us. A car salesman should be knowledgeable and helpful but he or she is not expected to be our advocate.

Can you imagine entering a showroom and having a salesman come up to you but instead of showing you cars, whips out a contract and says:

"Before I start showing you around, I'd like you to consider signing this contract. By doing so, I can represent your interest rather than that of the dealership. And even though I'm paid by commission, signing this contract will allow me to negotiate the best deal on whatever car you decide to buy."

If this happened to me, not only would I be confused, I'd be very skeptical:

"This guy wants to represent my needs and negotiate the best deal for me on a car, yet the amount of his compensation--or whether he gets paid at all--is wholly dependent on my decision. And how is it that he will use his skills and experience to negotiate the lowest price when he is paid as a percentage of what I end up paying?"

Now, let's look at another example - someone who is in the role of a fiduciary. Suppose you were having legal concerns regarding your finances. You would make an appointment to meet with a qualified attorney, and your expectation would be that you would pay that attorney for a consultation either by an hourly fee or a flat rate. You would expect that she would use her expertise to advise you regarding your financial issues and assist you in a resolution. And because you were paying her for her time, expertise, and experience, you would most definitely have the expectation that her counsel would be completely objective.

But suppose that during the consultation, the attorney started discussing some financial products that she sold on the side.

"Instead of paying me by fee, you can buy one of these products. I'll get a commission on whatever I sell you and you'll end up paying less."

If this happened, not only would you be confused, you would probably be out of there! Your expectation was that you were hiring a professional to consult with you, not to sell to you. Most of us would be very skeptical about an attorney giving truly objective advice if her pay was contingent on selling you something and on how much you spend overall.

How much trust would you give a doctor's prescription if he/she was paid as a percentage of how many drugs they sold? What about a CPA's advice if they were paid contingent on Uncle Sam being nice to you? Would you feel comfortable about your dentist telling you that you had two cavities that needed to be filled when he was paid by the number of fillings he performed?

So WHY do we continue to ask the public to trust our profession to give objective counsel regarding their real estate decisions when our compensation is contingent on their actions? Anyone who has worked as a buyer agent for any period of time has inevitably heard the following question: "Why would you negotiate the best deal for me when you get more money from a higher sale price?" My answer has always been:

"My business is built on referral. A few extra dollars in my pocket isn't going to mean beans when you find out that paid too much."

But while my answer is sound and reflects how I work, it still begs the questions of the inherent conflict of interest when you're compensated for moving product while charged with giving objective counsel.

As long as the amount of our compensation (or whether we get paid at all) is dependent on the actions of the client that we're advising, don't expect the client to truly trust our advice.

Now, this doesn't mean that we can't continue to offer commissions as an option, especially for clients that already know us. But commissions should be one choice in our toolbox, not the only one. Most consultants in other fields such as CPA's and attorneys offer options in the services they provide and they are often paid by a non-contingent fee. Whether we are representing sellers or buyers, if we are going to be regarded and respected as fiduciaries, we need to stop being limited to a salesperson's compensation.