Given the royal commission’s focus on broker remuneration and commissions, brokers have been outlining their thoughts on fees for service, with some defending fees, while others warn they would “decimate the broking industry”.
Craig Morgan, managing director of NSW-based brokerage Independent Mortgage Planners, has told The Adviser that the royal commission’s arguments over broker commission have “oversimplified” the make-up of commissions to an “almost child-like dichotomy” that they are either “bad because they create conflict or good because they create competition”.
Mr Morgan, who has charged a fee for service for nearly 10 years, commented: “It is clear that CBA’s Matt Comyn gave testimony about broker remuneration – and alternative models – that was disingenuous, calculated and self-serving.
“Enough has been written on this subject already, and we doubt the royal commission is blind to the Machiavellian tactics of the big banks.”
However, the MD said he took exception to the suggestion that consumers would not pay a fee for service, stating: “For nearly a decade, we have been operating on a truly independent, truly professional and entirely fee for service basis. Our clients span the spectrum from first home buyers to seasoned investors and from average income households to high-net-worth and high-income borrowers.”
“The only thing all our clients have in common is a desire to be sure that they are receiving expert advice that is in their best interests and that they can be confident they are genuinely getting a better home loan deal tailored to their specific goals and objectives. And the only way someone can have this confidence is to know that all conflicts have been removed.”
Mr Morgan acknowledged that moving to a fee for service model was a “daunting task” for mortgage brokers and reiterated that he did not support mandating a fee for service remuneration model for brokers (regardless of whether it is lender or consumer-paid), but stated: “We believe there is a significant demand for home loans provided by mortgage brokers remunerated under the current model with the amendments that are already being phased in. And consumers deserve the right to choose the model that suits them.”
Meanwhile, other brokers, such as Alex Anderson, founder and CEO of Chesswork Group, said that fees for service threatens to destroy a thriving and growing industry of approximately 16,000 brokers Australia-wide.
He said: “The current remuneration model works well for all parties concerned. The banks only have to pay for services rendered and even the big four have been reducing the number of branches and corresponding staff. Brokers get to provide a service to their clients without having to charge them, and consumers get the benefit of having an industry professional navigate the finance world and negotiate on their behalf without adding to their costs or debt level.
“Switching to a fee for service model will not only decimate the broking industry but will ultimately disadvantage consumers that will be forced to either fend for themselves in a market place where each lender has vastly different policies regarding acceptable income, age policies and servicing criteria or pay for the advice either directly from savings or borrow the fee and add to their home loan debt to cover the cost,” Mr Anderson said.
“Such a move would also reduce competition in the marketplace, which ultimately is the biggest advantage for the consumers in the long and short term as only the biggest banks in Australia will be able to cover the fixed costs associated with branches as well as the hefty advertising costs. Smaller lenders that derive their business primarily via the broker channel get to save on these costs and generally offer better rates and polices to consumers.”
He continued: “The biggest winners will be the big four with Commonwealth in particular set to make the most gains. Being the biggest bank in Australia, it has the largest capacity to advertise and can most easily absorb the fixed costs of sustaining multiple branches across the country.
“Conversely, they have been the bank to suffer the most from the broker model as brokers faced with cheaper options for their clients elsewhere are taking the consumers away from the big four, especially now that most consumers are more willing to use banks that don’t have branches at all.”
Mr Anderson concluded: “Any broker will tell you that their primary motivation is to position a choice of lenders based on rate and policies. Having said that, the only suggestion I would make to altering the current structure would be to standardise the percentages so as to reduce the potential conflict to zero.”
The Adviser commissions borrower study
As the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has called into question how brokers are paid, and intimated that it may recommend a ban of some commission structures (such as trail), The Adviser has commissioned Momentum Intelligence to produce a white paper to better inform legislators about the intricacies of third-party distribution.
The cornerstone of the report will be a major survey of borrowers to understand the decisions behind why they chose their mortgage provider, what their sentiment and understanding was around commission and, importantly, what would influence their decision when choosing which distribution channel they would use for a home loan in the future.
According to Alex Whitlock, director of mortgages at Momentum Media, a key question will be around borrower sentiment towards paying a fee for service and how this could impact their choice to use a broker.
“There has been great speculation around conflicted remuneration in the third-party channel. For this discussion to be complete, it is critical that we consider the borrower, who ultimately will be most affected should the cost structure in accessing a loan change.
“It is essential that borrowers have access to the widest possible range of lenders and products, ensuring robust competition in the mortgage market. This will ensure that mortgages are ultimately offered at the lowest sustainable margin by lenders.
“If we end up being forced to use the lender with the biggest retail network, history tells us that the cost to borrow will increase for the borrower.
The survey will be promoted to borrowers across relevant Momentum Media brands including Smart Property Investment and Nest Egg. It will also be made available to brokers to share with their clients to ensure the largest possible sample market.
You can share The Adviser’s survey available to your clients by following the steps outlined here.
[Related: Fees for service: Are they feasible?]
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.
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