Saturday, March 30, 2013

Finance Reserve – Should It Stay or Should It Go Now?

This is a guest post by Eric Andersen, the President of the College of Automotive Management. With the government's ongoing attack on dealership practices, dealers and their staff need to step up their game to remain competitive and protect themselves against legal pitfalls. Dealerships that employ highly-skilled professionals will certainly prosper despite any changes brought on by government regulations. In my opinion, the College of Automotive Management offers the absolute best-in-the-industry training and development for automotive professionals.

Finance Reserve – Should It Stay or Should It Go Now?
by Eric Andersen

Well stay of course! But unfortunately that’s likely not going to happen.

If there is one thing our country’s current administration has proven, it’s that they will regulate what they decide they want to regulate – and won’t stop until they do. If their new agency, the U.S. Consumer Financial Protection Bureau, is bent on putting the screws to auto dealers and their entrepreneurial spirit, they probably won’t stop building a case for a decision they have probably already made. Hence we will continue to see “breaking news” from this agency like the recent article dated March 28th, 2013 entitled Auto Loans Prompt 1,585 Complaints to New U.S.Consumer Watchdog.

So what is to be done?

Well after the ranting and raving is over (and I’m done now), the only logical thing to do is create a list of solutions and get in front of the problem. Offense is a great defense. Instead of spending any more time worrying or debating, we can use the circumstances to focus on creating new opportunities to increase total profits per sale.

Step 1: Determine what is most important to your company (the dealership). 

Due to a landslide of factors including factory incentives, the world wide web, and consumer opinion transparency, CSI should become every dealer’s number one priority and objective – above all else. When you stop and consider it, reserve profits are the only profit source in a dealership that produces ZERO CSI benefits. Paying for a vehicle comes with benefits. Paying for F&I products, parts or service comes with benefits. But paying for finance reserve does absolutely nothing to promote higher CSI. In fact, if abused, it can do the opposite (which is the agency’s case, blown out of proportion).  If CSI is more important to the company than reserve profits, then the thought process to find other positive solutions to increase profits per sale despite the loss of reserve can be continued.

Step 2: Change your pay plans now.

If you have pay plans for F&I Managers, Sales Managers or Salespeople right now that give them more incentive to increase the reserve rate vs. sell more valuable products and services to the customer, change them now. Who is more valuable to you? The insurance agent providing you with your car insurance, or the insurance agent that provides you with your car insurance, homeowners policy, health plan, and life insurance? The more business customers do with your company, the more valuable your company is to them, and the more meaningful that relationship is, and the harder it is to break. Redirect pay plans to focus more on aftermarket and F&I product sales income than reserve income. Then if reserve does go away, you won’t have an exodus of people because they previously relied on reserve income too heavily.

Step 3: Develop aftermarket and F&I product sales skills – from top to bottom, and track it.

Salespeople and Desk Managers have a dramatic influence on F&I product penetration. Provide training on how introducing the benefits of F&I products early and often in the sales process benefits everyone. Then reward salespeople and desk managers for achieving higher aftermarket and F&I product penetrations and thereby offset any loss of reserve income with valuable, CSI building F&I product income. In the future, when customers have big problems, they can be solved when claims are paid and thereby solidify customer loyalty while creating more repeat business opportunities (to replace vehicles when totaled, lost, or damaged). Also provide F&I Managers with “continuous” F&I product training, AND F&I sales process training to maximize their abilities to achieve higher product penetrations as soon as possible. Track the aftermarket and F&I product penetration of everyone involved and publish the results frequently. That helps keep everyone’s eye on the ball!  

Step 4:  Develop loan underwriting expertise at the desk and F&I level

Programs like CUDL have become popular, despite paying lower reserve commissions than captives or banks, because they create additional profit opportunities for the dealer.  Having these programs and knowing how to use them makes the dealer more money. That’s due to their unique loan underwriting policies. Perhaps a deal can ONLY be made due to a lower rate, or better terms provided to a member of a credit  union that can’t otherwise be obtained at a traditional lender, even though the traditional lender offers a chance for more reserve profits. If desk managers or F&I managers don’t know about, or understand how to maximize those lending options the dealership is not competitive and will lose a lot more income than reserve profits. Make it a priority to ensure every desk manager and F&I manager becomes an expert at A&B Lending programs including local credit union options, leasing, special finance, and other loan underwriting  and deal structuring disciplines in order to ensure maximum total gross profits are obtained and no sales opportunities are missed.

Once a dealership implements solutions to achieve all four steps, the increase in total profits for the dealership now, and later, can dwarf whatever reserve income may be lost later if the current administration continues to get its way. And you can continue to triumph, due to your optimism and entrepreneurial, never-say-die spirit!

Welcome to the College of Automotive Management, the world’s premier automotive management and loan underwriting school. The heroes of our story are the thousands of graduates who have attended the College since 1992.  As they implemented their new knowledge and skills they created their own stories of success in the automotive and lending industries. Today, they are the owners, managers, leaders and influencers of the industry and helping to champion the positive changes towards higher profits through customer satisfaction and legal compliance.

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