Magnussen fine-tunes F&I -- and it pays off

Offering options, hedging risk adds $1,700 per sale

During last year's downturn, Bernard Magnussen's five dealerships increased F&I income per vehicle retailed 22 percent in the hard-hit northern California market. They did it by scrutinizing every facet of selling F&I products. Says Magnussen, “I'm a numbers guy.” Photo credit: SETH AFFOUMADO
Ringing up an average $1,700 in F&I income on every car and truck you retail is possible even in a really tough year, says Bernard Magnussen. All you need to do is pay attention to the numbers.

Magnussen, president of Magnussen Dealership Group, knows how important it is because he came to the car business from the insurance side.

His appreciation, and understanding, of the importance of a dealership's finance and insurance operations helped his group make money in one of the hardest-hit markets during a terrible year for dealerships.

From hedging risks with reinsurance to giving its F&I people one-on-one training and ensuring they are able to earn some of the highest incomes at the dealership, the Magnussen group leaves little to chance when it comes to selling F&I products. It pays off.

Privately owned Magnussen Dealership Group, whose five dealerships are in northern California, posted average F&I income of $1,683 per new and used vehicle retailed in 2009, up 22 percent compared with 2008.The mighty service plan

Service contracts are the Magnussen group's most profitable product. The group sells factory service contracts as well as its own. Around 40 percent of its new-car buyers purchase a service contract, says Hayden Stone, vice president at Magnussen Dealership Group.

Evaluating the risk for those contracts, and adequately hedging that risk with reinsurance, is the key to making the contracts money-earners, Stone says. The Magnussen group uses actuary tables to determine the price for service contracts. Then it limits its risk with reinsurance.

“If we sell a contract for $1,000, our maximum exposure is $1,000,” he says.

The Magnussen group reinsures 98 percent of the service contracts it sells. The contracts are administered by a third party.

The third party works with an investment company to manage the income. “Once the dealership processes the contract, we don't touch the money,” Stone says.

The money is held in reserve for the life of a contract. Then, Magnussen group takes whatever is left as income.

Each quarter, the group sits down with the third-party administrator and looks at claims and investment activity, making adjustments where necessary, Stone says. If one class of car has too many claims, for example, the service contract price will be raised.

Rather than pool F&I income, each product is kept in an individual silo. For example, all the prepaid maintenance contract income is in one silo. That way a problem in one line of business doesn't spill over into the other lines, Stone says.

“You have to manage your risks like any other business,” he says.

Magnussen Dealership Group has five dealerships -- two Toyota, one Lexus, one Chrysler-Jeep-Dodge, and a Hyundai dealership that opened in April. Each is a stand-alone entity, with its own insurance and reinsurance company.

Dealerships often make money by charging the customer more for a loan than the dealership pays the lending institution. Magnussen dealerships don't rely on that form of income too much, Bernard Magnussen says. Customers can find a cheaper loan at a local bank, and then his company loses the loan.

Magnussen dealerships sell the usual F&I products, such as GAP insurance, from outside suppliers. It also sells several of its own products, such as a tires-for-life policy, prepaid maintenance plans and Glass Etch, a theft-protection policy. Those also are reinsured.

Each dealership creates it own menu, though the products are similar, Stone says. A product can't be included on a menu until it is approved by the management group, which considers the financial strength of the company offering the product and the product's claims and effectiveness.

“We don't sell any snake oil,” Stone says.

If an insurance company refuses to pay a customer claim, Stone has the authority to override that decision and pay the claim “in the interest of customer satisfaction,” Stone says.

That happens about half a dozen times a month, he says. “Our mantra is: ‘If we are going to make a mistake, we make it on the side of the customer,'” he says.

Magnussen dealerships have sophisticated Web sites. Customers can get information on financing for F&I products, schedule service appointments, and order parts through the sites. The group has two people dedicated to managing the Web sites at all five dealerships. The Web sites “are a big source of customers,” Bernard Magnussen says.

Although Magnussen may not get involved in the minutiae of running the dealerships, he does appear on many of the sites -- welcoming customers. His oldest son, Bo, -- the only one of his five children in the car business -- runs Magnussen Lexus. He and his father appear on the Lexus Web site.Where the action is

Magnussen, 71, was an insurance salesman. In the mid-1960s he worked for Pat Ryan and Associates (which later became part of the Warranty Group) helping dealerships set up departments and training people to sell his company's policies. “He was out there helping dealers create finance departments before they were even thought of,” Stone says.

Magnussen and Stone, 63, met 35 years ago when Magnussen visited the Ford dealership where Stone was sales manager. Stone has worked for Magnussen for more than 15 years.

Magnussen bought his first dealership, a Dodge store in San Jose, Calif., in the late 1970s. “I got bored with the insurance,” Magnussen says. “I liked the action of being a car dealer.” Magnussen is not involved in the day-to-day running of his F&I departments.

He prefers to hire good people for that, he says. The F&I salespeople at a dealership report to a manager, who reports to the dealership's general manager, who reports to the management company. Magnussen keeps an eye on the overall performance.

The outside vendor that monitors the performance of each dealership's F&I department also provides one-on-one training to the finance managers.

The Magnussen group aims to have every finance manager certified by the Association of Finance & Insurance Professionals.

F&I managers at Magnussen dealerships are paid a commission based on the value of the aftermarket options they sell. Their income is always in the top 10 percent at the dealerships, Stone says. F&I managers are required to offer all options to all customers rather than trying to judge what might be appropriate. “The management's goal is 100 percent of presentation 100 percent of the time,” Stone says.

Turnover is low -- 80 percent of the managers have been with the Magnussen group for three years or longer. “Our finance people are typically the best salespeople,” Stone says. “There is no salesperson that generates more income at the dealership.”

Magnussen Dealership Group has been hit by the downturn. It laid off close to 20 percent of its employees, including F&I staff, Bernard Magnussen says. Dealerships now have two to three F&I people each.

A rise in repossessions also has hurt -- if a vehicle is repossessed, Magnussen group has to pay the lender for the service contract cost. Its Dodge dealership has been especially hard hit because many of its customers work in the construction industry, Stone says. Customers also have canceled contracts to save money.

“When we have to pay that contract back, that is a reduction of finance income,” Stone says. The F&I numbers Magnussen group reported to Automotive News represent net income after those paybacks, he adds.

Stone sees a rough year ahead. All aspects of the dealership business, including F&I, will be challenging, he says. Challenging or not, F&I will continue to have a significant role at Magnussen dealerships.

“I always put a lot of emphasis on that type of income,” Magnussen says. “I'm a numbers guy.”

Magnussen Dealership Group
Headquarters: Menlo Park, Calif.
Dealerships: 5
Franchises: Toyota, Lexus, Chrysler, Dodge, Jeep, Hyundai
2009 sales: 5,958 new and used
Avg. F&I revenue per-vehicle retailed: $1,683
F&I strategy: Hedge your risks and offer your customers all the F&I options