Contingent Commission

  

Back in the 1960s, the insurance business was...cutthroat. It was the Mad Men era, after all, and the economy was facing a slew of challenges. At the time, insurance claims were jumping faster than inflation.

So companies just cut their agents’ commissions.

To ensure that the agents didn’t burn the building down, they started offering their agents performance bonuses. These “contingent commissions” would provide the agents with a percentage of the premiums if they met sales quotas and profitability milestones.

Think of it this way: they incentivize their agents to go out and sell insurance to people who don’t need it or won’t use it. Maybe they’re young people whom the agents convince they could die at any minute, or it’s a super conservative business person who is hyper-paranoid about a hurricane destroying his business...in the middle of Nebraska.

This would be funny if it were actually a joke.

The point is that agents are paid on a basis of how profitable a customer is to their business. The less insurance that a client uses, the more profitable those policy holders are to the company.

As a result, the agents receive a small cut of those premiums.

Related or Semi-related Video

Finance: What is a Contingent Deferred S...10 Views

00:00

Finance a la shmoop. What is a contingent deferred sales charge? Urgh, mouthful all

00:10

right well when you buy any flavor of mutual fund you're paying fees that go [Selection of ice creams with mutual fund labels]

00:14

to your broker. How you pay these fees which are called loads or commissions,

00:20

depends on the type of mutual fund you have and the way you're buying it. [Table of mutual fund types and share types]

00:25

A-shares have a front end load. They're the traditional format in which the sale

00:30

of a mutual fund gets commissioned. Meaning you pay your fees to the selling

00:34

broker when you buy. So on an individual share sale like at a net asset value in

00:40

a mutual fund well you might pay $14.68 for a [The price is highlighted]

00:44

share of that mutual fund but net of commission well you start out

00:48

compounding your investment at a value of 14 dollars and 37 cents like you paid [The compounded investment is highlighted]

00:53

31 cents there in commission. All right next up B-shares, well B-shares carry

00:59

what is called a contingent deferred sales charge. That's fancy nomenclature

01:05

for quote no-load unquote kinda-sorta in fact what's going on is that the load or [Money going from you to the mutual fund]

01:10

commission is paid by the management company responsible for buying and [Money going from the management company to the broker]

01:14

selling shares inside of the mutual fund rather than by an upfront sales charge.

01:19

Like each year they're essentially paying off the broker his commission for [The management company paying the broker]

01:24

selling you that share of the fund, so your fee structure when you pay your

01:27

commission upfront might be that the fund costs you one percent a year to be

01:31

managed but if you opt for B shares with no commission upfront your annual

01:36

fee might be something close to 1.5 percent per year and as long as you hold [The annual fees of each share type are shown]

01:42

the mutual fund well say eight years or more, well then you will be

01:46

considered to have paid your commission in the form of the extra half a percent [Chart showing the comission prices of both share types being the same after 8 years]

01:51

per year that you were charged in these forms of B-shares and if you do the math

01:56

you're likely getting a way better deal to just pay your commission upfront and

02:01

take the lower fee going forward and remember that contingent thing in there? [The word contingent is circled in the video question]

02:06

Well the no-load status of your fund is contingent on you owning

02:11

the fund long enough so that the high management fees each year can then go to [Management company paying the broker each year]

02:16

pay off the broker if you sell your fund early well then you'll be charged extra

02:20

as you exit right. Remember that over time the stock market goes up a lot

02:25

usually so why would you want to pay a percentage of your likely increasing [Stock price chart going up]

02:29

asset-based annually in the form of higher fee structures rather than lower

02:35

fee structures year after year yeah usually financially this doesn't make [Mutual fund performance chart showing increasing value]

02:39

sense. So the term here revolves around the notion that your sales charge ie

02:43

your commission will have been deferred under the B share structure and the [Deferred stamp]

02:47

amount you pay is contingent upon how long you hold the shares and pay the

02:50

likely much higher fees annually rather than just biting the bullet up front.

02:54

Just as in baseball there's no free lunch in the land of mutual fund buying. [Waiter bring the bill for a guys food]

02:59

Yeah, bottom line, do the math.

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Finance: What is Contingent Liability?
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What is Contingent Liability? Contingent liability refers to a possible liability in the future contingent upon some other event being the trigger....

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