How Product Knowledge and Agent Commissions Affect Consumers of Financial Products

Imagine sitting in an investment broker’s office with the intent of getting information about investment products that you had been putting off, until now. With retirement looming in the not too distant future, you want to make sure you and your wife can settle into the easy life. You soon notice the agent pulling some papers out of her drawer and anticipating the worst, you brace yourself for the impending sales pitch with a mental reminder to be wary of the “hard sell” that is soon to come. Unfortunately, this is all too common an occurrence in the financial services industry, which has been criticized for a lack of transparency with regard to risks, fees, and the general opaqueness of the information supplied to customers. At issue is the asymmetric information imbalance between the financial agent and the customer. Agents know their products well, but many individual consumers may find it difficult, costly and confusing to obtain information on the thousands of financial products available. Such an information imbalance may encourage divergent risk-seeking behaviors by commission-based agents, particularly when recommending no-load and load mutual funds.  A no-load mutual fund is one in which the agent does not make a commission on the “sale;” whereas a mutual fund that carries a load, is one in which a consumer pays an upfront fee, or commission, upon purchase.

DeCarlo 200.jpgDr. DeCarlo and his colleagues address this general issue by investigating the following questions: 
  1. What factors trigger consumer suspicion when interacting with financial agents?
  2. How does consumer product knowledge affect the way financial agents should interact with consumers?
  3. Does the agent’s compensation on a financial recommendation, if disclosed, affect consumers in some way? If so, how?  
Data from a series of experiments collected from consumers across the country revealed some surprising results. Results from Study 1 showed that higher product knowledge consumers, relative to lower knowledge consumers, became highly suspicious and lowered their purchase intentions when commission rates of the agent were disclosed, particularly when the rate was at the top end of industry averages.  Lower knowledge consumers appeared to be less able to understand the implications of how load funds impact future returns on their investments. As a result, they demonstrated greater trust and purchase intentions after interacting with the commission-based agent.

Study 2 results, however, were a bit more unexpected when we introduced different financial products to the model.  In fact, we found a reversal of the effects in Study 1 for consumers with higher product knowledge. Higher knowledge consumers became more trusting of the agent and more likely to buy a mutual fund that carried a load (or fee) from a commission-based agent as compared to a commission-based agent that recommended a no-load fund, despite the fact that it would, on the surface, be cheaper for them to do so. Higher knowledge consumers became suspicious of the “deal” and searched for reasons why the agent would act inconsistently with his/her own self-interest. Their focus on the inconsistency between the agent’s compensation and the recommended product appeared to lead them down a more expensive path. Lower knowledge consumers, however, did not display these types of coping mechanisms, although they also were more likely to make poor decisions overall. We found that these consumers were not only less able to make informed decisions from the information provided by a financial agent, but in analyzing their reasons supporting their decisions we found they often discounted the importance of additional costs, such as commission-based fees, despite the fact that their returns would be significantly lower over time.

These results have important implications for the financial products industry. While higher consumer product knowledge levels should put consumers in a position to make better financial decisions, our studies show they too can be vulnerable under certain conditions, particularly when the conveyed sales message is inconsistent with the salesperson’s compensation. For those who fall in the “lower product knowledge” category, which, unfortunately, includes the majority of consumers in this market, our results suggest that such consumers may rely too heavily on the salesperson’s recommendations when it comes to financial products. As noted earlier, it may be due to the shear volume of choices and the different ways in which these products are marketed.  A useful first step in this regard would include standardization of the formats for delivering pre-contractual transparency, such as fee and commission documentation. We believe that any effort to promote consumer product knowledge from either consumer education programs or better transparency will enhance the efficiency of retail financial markets. 

Dr. Thomas DeCarlo (Ph.D. University of Georgia) is the Ben S. Weil Endowed Chair of Industrial Distribution at UAB. His primary research interests deal with strategic issues in sales force management, customer relationship management, and marketing communications. Dr. DeCarlo has also conducted many seminars and research projects for companies dealing with market analysis and segmentation, sales force and brand management and new product development. In addition to co-authoring a top-selling sales management textbook, Dr. DeCarlo's research has been published in journals such as, Journal of Marketing, Journal of the Academy of Marketing Science, Journal of Consumer Psychology, Journal of Personal Selling and Sales Management, Journal of International Business Studies, Journal of Service Research, Industrial Marketing Management, among others. This article appeared in the Journal of Academy of Marketing Science in July 2013.