The recommendation to end the payment of trailing commission by the Productivity Commission and the banking royal commission sparked fears over the longevity of the broking industry. The Adviser asked brokers what the purpose and value of trail is to their business and their customers.
When asked about the importance of trailing commission to her business, Kristy Dunphey, co-founder of Up Loans, told The Adviser that trail helps fund “ongoing health checks” for customers.
“We provide ongoing health checks, reprices, changes of structure, etc. without the need to charge my client for this service, or to actively look for an upfront fee structure by moving a client to another lender unnecessarily,” Ms Dunphey said.
“Trail enables me the revenue in my business to have staff committed to supporting these checks and administration tasks as well as my time in providing this holistic ongoing service to my client.”
For George Smith-Roberts, a realestate.com.au Home Loans broker with offices in regional NSW and Queensland, trail helps cover operating costs.
“I only earn what my trail commission is, and once that goes, businesses, particularly mine, will have to seriously think [about] how we structure ourselves and pull back,” he said.
Mr Smith-Roberts went on to note that trail is a deferred payment for the work brokers do for clients.
“When you add all the costs involved in actually generating a loan, the upfront is not enough,” he said.
“I’m a regional broker; our average loan size is $250,000 to $280,000, so an upfront commission for that is around $1,200.”
The realestate.com.au Home Loans broker continued: “And it’s the regional clients that benefit the most from having a mortgage broker do the work for them. Most of the loans that we write are for clients that are [hundreds of kilometres away] from a branch.”
Timothy Gibbons, director at AgLend Finance, expressed a similar concern, saying: “Any negative changes that have an impact on remuneration can hurt regional brokers, mostly due to the points of low volume, loan amounts and difficulty with postcodes.
“If they are already having [these] issues, they will be pushed out, as it is unsustainable to spend more time or receive less money on deals with small margins.”
A point to remember, according to Frank Paratore, national operations manager at Specialist Finance Group, is that trail, as a “deferred upfront payment”, was introduced by lenders as a “means to minimise and eradicate churn and, most importantly, to ensure a greater ongoing service for the client”.
Clint Waters, director at Axton Finance, noted that there is a lot of work brokers do in the background “that don’t get much attention but take a lot of time” to service existing clients, such as files reviews and general account and client maintenance.
“Some of the banks [also] contact us to make further inquiries as to what’s happening with the client. There’s true value that’s being provided there,” Mr Waters added.
The cost of running a brokerage is also “not too dissimilar to a [bank branch]”, according to the Axton Finance director.
“I’ve got to pay rent, staff, insurances, aggregation fees, marketing costs – a bunch of stuff,” he said.
Mr Waters believes abolishing trail “will greatly [diminish] the value that a broker can provide to a client through their journey”.
“The clawback and the policies that are in place for performance of loans [are] definitely there for a reason. If the loan doesn’t perform, we don’t get paid,” he continued.
For Mihir Shrestha, mortgage consultant at Origin Finance, trail is also “an effective tool to value [a] business” and “it’s a very crucial measure while selling or buying any mortgage broking business”.
Tas Bindi is the features editor for The Adviser magazine. She writes about the mortgage industry, macroeconomics, fintech, financial regulation, and market trends.
Prior to joining Momentum Media, Tas wrote for business and technology titles such as ZDNet, TechRepublic, Startup Daily, and Dynamic Business.
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