Ask Brad: What Can a Wirehouse Broker Learn from a Car Salesperson?
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Deride the tactics of car salespeople all you wish, but their primary sales tool shows just how much brokers pay their employers.
The ever-meandering YouTube algorithm has been feeding me videos of a guy who trains car salespeople.
While I have no desire ever to sell cars, I was intrigued by one of them.
The trainer was pitching various “closing” strategies. He referred to one of them as the “reduce-to-ridiculous” close.
Here’s how it works.
Imagine a car buyer picks out a nicely equipped vehicle. With financing, the purchase comes to $800 per month. The car buyer was hoping for something closer to $700 per month.
At $800 per month, the sale is in jeopardy. Enter the “reduce-to-ridiculous” close.
The salesperson reminds the potential buyer that the $800 per month vehicle has all sorts of fancy bells and whistles: heated/cooled seats, upgraded sound system, a higher performance engine, upgraded rims, etc. It provides the buyer with not only a more comfortable ride, but they’ll be proud to be seen in it.
The salesperson points out that the same model is available, absent all the upgrades, for $700 per month. The buyer can choose that path if desired.
But the salesperson coyly points out that the difference between the low-end version of the car and the fancy, more comfortable, ego-padding high-end version is $100 per month. With 30 days in a month, that comes to just over $3 per day.
Hence, “Mr./Mrs. Car Buyer, for a mere $3 per day, will you walk away from the fun version of the car, the one you really want to have?”
The idea is to “reduce” the optics of a pricing gap to a “ridiculously” small amount to close the deal.
Think what you want of this strategy; I’m sure it sometimes works.
Before you sympathize too much with car buyers who apparently “fall” for this approach, consider what you might be overlooking yourself as an advisor. A similar calculation can be painful.
While financial advisors of all sizes work under different affiliation models, let’s assume you are a wirehouse broker producing $2 million per year in fees and commissions.
While the “payout” rate and calculation method varies from firm to firm, for argument's sake, we’ll assume you receive 50% all in when you factor in payout, benefits, etc. Your true payout is likely meaningfully lower than this (deferred comp, anyone?). But to not turn this into a debate about payout calculations, I’ll offer up a full (generous!) 50% calculation.
Thus, while you retain 50% for yourself, you pay your firm 50% for the value they provide in return (an office, benefits, tech, etc.).
Put in dollar terms, you pay your firm $1 million annually.
Are you receiving $1 million of value in return?
This is a less comfortable way to think about it versus positioning it as “50%.”
Let’s reduce this to the ridiculous.
Annual revenue of $1,000,000 comes to $83,333 per month. Imagine on the first of each month, you must write your firm a check for $83,333 for the value they will provide you that month. Are you getting $83k worth of value in return?
Let’s “reduce” it even more.
If you take four weeks off per year, you’re working 240 days.
That $1,000,000 per year comes to $4,167 per day!
Imagine if every day you walked into your office, you had to stop at the front desk and write your firm a check for over $4k! Every single day, you must do this. Are they providing you with over $4k of value per day?
The car buyer was “fooled” into overlooking the car's higher price because it was expressed as only $3 per day. Are you equally unappreciative how much you pay your firm because it is expressed as a percentage payout?
The math is painful when put in dollar terms and reduced to the ridiculous.
Could you instead run the overhead of your own independent practice for less than $4k per day? And with more flexibility and satisfaction to boot?
If you don’t know how that math would look for your practice, it’s time you learned more.
An independent path is not a fit for all advisors, but the economic savings can make even a car salesperson blush.
Brad Wales is the founder of Transition To RIA, a consulting firm uniquely focused on helping established financial advisors understand everything there is to know about WHY and HOW to transition their practice to the RIA model. Brad utilizes his nearly 20 years of industry experience, including direct RIA related roles in compliance, finance and business development, to provide independent advice regarding how advisors can benefit from the advantages of the RIA model.
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