Many car dealers are missing out on extra money, and most don’t even know it. The gap shows up in something called investment income. Joining us on today’s episode of Training Camp, Rob Johnson, Vice President of Sales at Ascent Dealer Services, explains how it works.
When a dealer sets up a profit participation program, where the dealer owns a share of the reinsurance company that backs their F&I products, like warranties, the money comes from two places. The first is underwriting profit, which is what the dealer keeps after paying claims and expenses. The second is investment income, where the money the dealer earns by investing the cash set aside to pay future claims.
According to Johnson, many dealers pay close attention to the first number but end up ignoring the second.
Start by asking questions
Many dealers don’t even know they have a choice. Johnson says they accept whatever their provider tells them and never push back. But he advises dealers to start asking questions.
The first question they should ask revolves around limits. Once a dealer knows the rules, they can determine how to invest the reserve money. The goal, Johnson says, is to grow investment income until it covers the full cost of claims. When that happens, the dealer keeps all of the underwriting profit, year after year.
"Your investment income should get to a point where it takes care of 100% of your claims. And when you do that, you're going to keep 100% of underwriting profit year after year, which is huge."
Johnson says dealers also need to ask about who is handling that money. A provider may be great at handling risk but may not be a true investment manager. Dealers should know whether a real expert handles their money or whether the provider just drops them into one or two basic plans.
Check the investment split
The next thing, Johnson advises, is to check the investment split. That’s the rule that controls how the reserve money gets divided.
- Most programs use a 90-10 or 80-20 split. The larger share goes into safe, fixed investments like government bonds, Treasury bills and cash. The smaller share can go into money market accounts, ETFs and mutual funds.
- Some providers allow a more aggressive split, such as 60-40 or even 50-50. That can lead to more investment income.
Johnson says dealers should find out who sets the rules, the provider or the investment firm, and whether the dealer gets a say in where the money goes.
Tap into the B account
Then there’s the B account. Johnson describes it as the extra cash in a dealer’s position. It comes with fewer rules than the reserve money.
Two things decide how hard that money works. The first is when the dealer can move it. The second is how often the money gets swept into the account. A slow, once-a-quarter sweep can leave cash sitting idle for months. Faster access, he says, keeps the money working. A dealer can take that money as a loan or as a dividend.
Johnson calls investment income the third lever of profit participation. Most dealers skip it, he says, not because it’s off-limits, but because they don’t know they have a choice. Taking a closer look may be the key to unlocking untapped profit potential at your store.
