How They Earn Their Daily Bread - stock brokers, real estate agents, and other sales professionals - Statistical Data Included

Kiplinger's Personal Finance Magazine, June, 2001

TO SHOW HIS APPRECIATION to his clients last year, investment adviser Scott Hanson invited them all to dinner, along with their guests. About 900 showed up at the convention center in Sacramento, Cal., and the bill set Hanson back $70,000. This year he expects 1,200 to dinner, and the cost could reach six figures.

His may be an extreme case, but it points out the lengths to which successful people in occupations that depend on commissions and fees will go to keep their customers satisfied. In effect, you are the boss of stockbrokers, real estate agents, car salespeople and financial planners, because money in their pockets comes out of yours. Knowing how sales-oriented entrepreneurs are compensated makes you a better customer--and can inspire you to suggest deals that are fair to everyone.

A debt of thanks

HANSON CAN EASILY afford to treat his clients to a thank-you dinner. Last year he grossed about $900,000 from the flat, 1% fee he charges them to manage their retirement portfolios. A partner in Hanson McClain, the investment advisory firm he co-founded in 1993, he manages a total of $600 million, so the average customer, with assets of $500,000, pays $5,000 a year.

Hanson, 34, started his business after two years as a life-insurance agent. For years he put in 70-hour weeks to build his clientele while simultaneously managing his customers' investments. Now he has a staff and takes Fridays off, but he's usually on call and spends about half the workweek going over his clients' portfolios. Once a month he holds seminars to generate new business. He also hosts a local radio talk show and writes a newspaper column.

Hanson has achieved broker nirvana--a substantial income that isn't dependent on fluctuating commissions. On average, retail stockbrokers paid, by commission earn $173,850 a year, according to industry data, after their firms take a cut.

Trade a stock at Edward Jones, for example, and you'll pay a commission of 2% to 3%. Typically in the industry, brokers do have discretion to give customers a break, depending on the size of the account. Of the amount you actually pay, Edward Jones gives its brokers 40% and keeps 60%. The split is similar with bonds, load mutual funds and annuities. On average, brokerage firms give their reps 37% of the commission paid by investors.

Brokers can boost their income with production bonuses, profit-sharing plans and trips to Europe or Hawaii for beating sales goals. A broker who has a very large client list or who does a lot of business can negotiate to keep a bigger percentage of commissions by switching--or threatening to switch--firms.

Hanson dislikes commissions. "I think there are flaws with that whole compensation system," he says. On the other hand, hourly fees make clients impatient to "turn the meter off." But they apparently don't balk at paying 0.25% four times a year--a far cry from what Hanson made his first year as an insurance agent, when, he says, "I nearly starved to death." --JEFFREY R. KONSETT

A slice of the pie

A REAL ESTATE AGENT for 11 years, Alan Leary had his best year ever in 2000. He had a hand in the sale of $6 million worth of homes in Carteret County, N.C., a long strip along the state's southeastern coast that is home to many retirees. At a typical 6% commission, Leary's $6 million in business, which included both listings and sales, generated $360,000 in commission income.

But lots of hands reached out for a share of that money on its way into Leary's pocket, and he actually grossed $105,000--before expenses.

Consider the sale of a four-bedroom house that closed on January 31, 2001. The house had been on the market for 195 days, more than a month longer than the 155-day average, says Leary, 45, who is affiliated with Century 21 Newsom Ball Realty, in Morehead City. It was the slowest time of year for sales, and the 30-year-old house had only one and a half bathrooms and wasn't completely air-conditioned, so it wasn't prime property. Listed at $134,500, it finally sold for $125,000, or 93% of its list price. Leary aims to sell a house for at least 95% of its list price, so this one was "just a tad off."

In the real estate business, a commission of 6% or 7% is standard, regardless of how much a house sells for or how long it sits on the market. At 6% of the sale price, the seller in this case paid a commission of $7,500. But a competing real estate agency that produced a buyer for the house was entitled to a share of the commission. Often the commission is evenly split between listing and selling brokers, but in this part of North Carolina it's common for the listing broker to keep 60% while the buyer's agent gets 40%. So Leary and his agency kept $4,500.

Real estate agents insist that commissions are negotiable, and in this case that was true. Leary's agency gave the seller a $600 concession because, says Leary, the seller was a repeat customer and a friend of the broker. That brought Leary's share of the commission down to $3,900.

Century 21 claimed its franchise fee of 6%, or $234 in this deal. Then the broker assessed a fee of $25 for liability insurance to cover errors and omissions in the transaction, leaving $3,641.