Much ado about advice

Changes to the National Consumer Credit Protection Act (NCCP) forced improvements to the professionalism of the third party distribution channel.

Their implementation not only required brokers to meet specific educational standards, but also to adhere to ‘responsible lending’ practices.

But the reforms also increased the amount of work needed to get an application over the line.

According to The Adviser’s latest NCCP survey, more than one in three brokers now work an additional five hours every week to meet the compliance requirements.

Moreover, 74 per cent of the 441 brokers who responded to the survey said NCCP had increased their workload “substantially”.

It’s not hard to understand why more and more brokers are talking about the possibility of charging a fee for their services.

If they have to work harder on every loan application, it stands to reason they should be paid more for every application.

Meanwhile, the implementation of the Future of Financial Advice reforms – which cover the financial planning industry – also has the third party distribution channel talking.

The changes, unveiled by the federal government in 2011, require planners to act in the best interests of their clients.
Planners are therefore encouraged to become more client-focused and have their fees paid directly by the client rather than indirectly, from product commissions.

Conflicted remuneration, including commissions paid by product providers, has also been banned under FOFA.

These measures have, however, attracted notable criticism from across the financial advice industry.

Many brokers now consider it quite possible that a fee for advice model may become the norm in the future – in the same way that it has for financial planners.

According to The Adviser’s latest fee for advice survey, more brokers than ever before are charging a fee.

In fact, 26.8 per cent said they did charge, which is an increase from the 22.9 per cent figure recorded in 2011.

In addition, more than one third of brokers admitted to ‘considering charging a client fee’ in the future.

But while it is clear the fee for advice debate is running hot and more brokers are actively reviewing their options, a majority of brokers are still adamantly against charging for advice.

When asked whether or not the future of broking lies in fee for advice, more than 60 per cent of the 400-plus brokers said no.

WHAT’S THE PROBLEM?

So, why are so many brokers against the implementation of a fee for advice model?

Bernie Lewis’ chief executive, Stefan Lipkiewicz, says many are just “nervous” because the industry has previously set its stall up on offering ‘free debt advice’.

“I think many brokers are concerned that if they start charging a fee for their advice, then their clients will be more inclined to go straight to a bank branch or source their home loan online, where they can get a home loan for free,” he says.

And it seems there is good reason for brokers to feel this way.

According to recent research conducted by Mortgage Choice, while first home buyers are more inclined to use the services of a mortgage broker than go directly to a bank, they will not engage the third party distribution channel if they have to pay for advice.

Of the 1,000 first home buyers surveyed, more than 50 per cent said they would not use a broker if they were charged a fee.

Mortgage Choice chief executive Michael Russell says the data reaffirms the brokerage’s decision not to go down the fee for advice path.

“While debate continues to heat up in the mortgage broking industry about the prospect of customers paying a fee for their mortgage broker’s service, Mortgage Choice would like to reassure our customers we are not taking any action on the fee for service front,” he says.

Mr Lipkiewicz, however, believes brokers who do not charge a fee are “selling themselves short”.

“[They] are undervaluing themselves and their advice,” he says.

“While some brokers are hesitant to charge a fee because they believe borrowers will stop using their services and go direct to a branch, [they] obviously don’t understand what it is they provide to borrowers.

“Brokers don’t just sell one product to a client – they are not agents or representatives for one particular lender. They offer sound debt advice.

They listen to clients, take the time to understand their needs and then find them the perfect solution.

“They don’t just find a ‘not unsuitable’ product – anyone can do that – they find them the most suitable product and give them advice on debt structuring and their financial wellbeing.

“The sooner brokers realise this, the sooner the industry will be able to move towards a fee for advice model.”

Bernie Lewis is currently the only brokerage that has a fee for advice model in place. According to Mr Lipkiewicz, however, as the industry matures and borrowers become more financially savvy, the more borrowers will see merit in using a broker and paying a fee.

“Slowly but surely, the industry is starting to come of age,” he says. “Brokers don’t just put a borrower in a product, they do a lot more than that and clients are starting to understand that.

“Australians pay their accountants and financial planners for advice and I think, in time, they will be more than happy to pay their broker. Many understand the value of a broker and for those who don’t, it is up to the broker to identify their point of differentiation and explain clearly to their clients the value they will add to them and their financial future.”

Bernie Lewis brokers explain their value to clients through a statement of advice, according to Mr Lipkiewicz.

The statement not only outlines a broker’s recommendations but also differentiates the broker’s service proposition from that offered by branch managers.

“No branch manager or online mortgage provider will offer a statement of advice to their clients. We do. That’s how we show what our ‘advice fee’ is for,” he says.

IDENTIFYING THE PROS

Of course, Bernie Lewis brokers aren’t the only ones using a fee-based business model. Empower Wealth’s founding director, Ben Kingsley, charges some of his clients a fee for advice.

His investor clients are charged for strategy and structuring advice, Mr Kingsley explains.

“We don’t charge any fees for our lending product advice or for loan application processes, as the commission we receive from the lender is our fee for these services,” he says.

“But, with that in mind, I believe best of breed brokers should value the loan strategy and structuring advice they provide their clients and, as such, have the option to charge a fee for their professional knowledge and skills as it has the potential to save the borrower many thousands of dollars.”

So, how does a broker go about charging a client fee without pushing their borrower straight into the arms of a bank branch, and what are the benefits of the fee-based model?

According to Mr Kingsley, the broker must first detail the value they are adding to the client.

It is also important to outline exactly what the fee is for and what services any commission payment covers.

“I’d like to see mortgage brokers realise and embrace the new opportunity that regulation has given us in terms of being the first profession that households speak to about managing their finances better,” he says.

“From cash flows and budgets to credit cards and home loans, mortgage brokers have the opportunity to help consumers make their money work harder for their households.”

According to Mr Kingsley, if brokers can effectively convey this to their clients, they shouldn’t have a problem charging a fee. The fee, he adds, brings with it a multitude of benefits, including greater remuneration, work satisfaction and client retention.

IDENTIFYING THE CONS

While there are obvious benefits associated with charging a client fee, many brokers claim there are just as many drawbacks to the fee for advice model.

Finance Made Easy director Tony Bice says he tried to charge a fee for advice but found that doing so pushed many of his clients down the road and into the arms of either another broker or a bank branch.

“I tried charging a non-refundable fee for advice two years ago and I didn’t have a lot of success,” he says.

“A lot of my clients come to me from the web. They are online doing some research and come across my services. When I [said] I charge a fee for my services, I found many chose to keep looking and go to Mortgage Choice or Aussie where they can get the same service for free.”

As a result, Mr Bice decided to change tactics and start charging all of his clients a “commitment fee”. This fee, of $600, is refunded to the client upon settlement of their loan.

“I just found that the commitment fee covered me if, for one reason or another, the loan did not progress to settlement,” he says.

“In this industry, we only get paid if the loan settles. Consequently, there are times when we can spend days working on an application only to have it fall over at the final hurdle. If this happens, we don’t see any benefit from all the work we have done.”

Mr Bice says his commitment fee allows him to be reimbursed if the deal falls over, adding that his clients are very supportive of it.

“Once I explain to them that they will be reimbursed once the deal settles, they are a lot more comfortable with paying the fee,” he says.

“I like the idea of charging for our advice, but I think at the present time, with the industry the way it is, charging a client fee is simply unfeasible.”