Free or fee?

It seems nothing in life is free anymore.

We buy bottled water from stores and oxygen from bars. We pay to walk in parks and for other people to listen to our problems.

Consumers, it seems, have increasingly become willing to cough up for things that once came for nothing. But if everything in life has a price – why are brokers still giving it away at no cost?

Many feel charging a fee is the ultimate solution to revenue losses created by the recent spate of commission cuts. The idea has gained even more clout in the face of rumours that there will be more hard times ahead.

Industry pundits such as Fujitsu Consulting’s Martin North predict major banks will use their market dominance to further slash broker revenues.

“I don’t think we’ve come to the end of commission structure changes in Australia – we’ve just started that really and I think we’ll see some more over the next 12 to 18 months,” North told brokers attending the Gold Coast Forum recently.

Advantages
Switching to a fee-for-service model isn’t only beneficial to brokers’ bottom line. Consumers stand to gain as well.

Despite huge lending panels and claims of independent advice, most brokers recommend a small number of loan options to their customers.

A Fujitsu Consulting report on brokers in 2006 found that the majority of brokers use three to six lenders consistently.

Many said the wide variety in lender processes make it inefficient for a small business to deal with many lenders and they get no scale in their activities.

But brokers aren’t just picking favourites to create greater efficiency.

Many exposed their bias when Westpac became the first bank to announce its cuts to commissions.

“In Australia, being honest, the broker doesn’t serve the best interest of the consumer quite often, nor is the broker the agent for the bank. The broker does what’s best for the broker. And that’s despite the fact that in Australia all the research says that consumers really value the independent objective advice of brokers,” North says.

“No doubt some brokers do provide best advice, but there are unfortunately a few who don’t and they will be influenced by the commissions that they get paid.”

North says that one of the country’s largest aggregators sent an e-mail to all of their brokers advising them to no longer recommend Westpac to their customers after the lender became the first to cut commissions.

“What they haven’t realized is that by doing that they’ve shot themselves in the foot, because it demonstrates that they are not providing independent, objective advice.”

A think tank meeting with some of the country’s top brokers during the Australian Brokers Forum on the Gold Coast revealed that many feel it’s not even a viable demonstration against the banks, seeing as they all followed Westpac’s lead.

“All [aggregators] are saying is vote with you’re feet. Well, how many more banks do we have to walk away from?” asked Duncan Perkins, Home Loan Essentials.

Switching from the current commission model to a fee-for-service model would take away any ambiguity regarding brokers’ objectivity.

Arguably, charging a fee would also raise the level of professionalism in the industry. Lawyers charge a fee, financial planners charge a fee, accountants charge a fee – consumers expect to pay for professional service. Why should the service provided by mortgage brokers be any different? Sometimes it’s just a matter of optics. People see value in something they have to pay for.

But how readily will consumers make the switch from utilizing a free service to paying for it? And how much is acceptable?

Obstacles
Research with focus groups has revealed that there may be an educational barrier that needs to be addressed before consumers readily accept paying for mortgage advice.

“In Australia, consumers are very confused about for whom the broker works. They are assuming for the moment still that the broker today is providing objective advice, that he’s not influenced by commissions. As soon as you start talking with them about the remuneration models that brokers actually have … then there seems to be some degree of appetite to consider alternative models which include a fee for service – if the service was really professional, independent and objective,” North says.

Altitude Solutions director Jeana Scott says she believes consumers should be sold a tangible document that includes advice – similar to what financial planners provide their clients.

“When I’m seeing clients it’s not just a loan product, in fact I never even talk about a bank or a loan product in my interviews. It’s an actual strategy that we’re talking about – what are they trying to achieve.”

Scott gives her clients a debt advice statement, in addition to helping them find loan solutions.

Mark Turnbull, director of Horizon Financial, agrees that brokers will be able to charge a fee if they follow a professional advice model.

“I personally think it’s inevitable that’s the way the industry is going to go.
I don’t think as an industry we’re going to be able to survive just by providing home loan advice. We’re going to need to provide other areas of advice,” he says.

Pinnacle Capital managing director Peter Goldberg says brokers could consider charging customers an annual fee.

“I try to see my clients on a yearly basis to review their portfolio. At that moment, there may be an opportunity to charge $200 or $300,” he says.

How much brokers charge for service could be linked to how much they stand to lose in the face of commission cuts. Unfortunately, it isn’t easy to determine how much brokers will be losing. Quality metrics, star ratings, cross-sell bonuses and new clawback schemes mean there’s a whole host of variables that will affect brokers’ earnings.

Cube Home Loans BDM Scott Beattie crunched the numbers and came out with a rough estimate. He believes brokers stand to lose approximately $1,500 on an average $300,000 loan.

Would consumers be willing to pay $1,500 on top of making one of the biggest investments of their lives?

“There are brokers out there charging $3,000 now and some people pay it. Some people assume it’s the norm,” Beattie says.

Convincing consumers to pay will not be an overnight process. Many financial information groups warn consumers about upfront fees. The ASIC site explicitly states:

 “Never, in any circumstances, pay a broker an upfront fee to arrange a loan. In some states, this is illegal. Even where it is not, avoid brokers that charge you upfront.”

If Australia is truly going to move in this direction, then it requires the support of industry and regulatory bodies, says Peter Vickerson, managing director of ABC Mortgages.

Vickerson says industry bodies should play a role in educating consumers about the fee-for-service model.

Commission cuts have convinced Vickerson to charge a brokerage fee.

“Take Westpac – if you take the upfront and three years worth of trail it represents a 40% cut in income. No significantly sized business can sustain that.”

He’s considering charging his clients a fee for loans put through lenders that have reduced commissions. Not only will customers receive unbiased information, they’ll receive better information, he says.

“If brokers are charging a fee, their service has to be absolutely top notch. I think that would force brokers to raise their standards as well.”

Vickerson doesn’t foresee clients having a problem accepting the change.

“I’ve spoken to some investor clients and they said yes they would pay a fee because they know the worth or value of the service being provided. There may be some resistance at first, but it’s either that or go out of business.”

The only resistance he’s received so far has been from his aggregator.

Support
How will aggregators respond if the industry moves toward a fee for service model? The situation overseas might provide some insight.

“In the UK the aggregation model isn’t quite the same as here, but there are umbrella organizations that provide platform services and indemnity insurance to brokers and those players were quite keen to exploit this model because they could see there was an advantage. But quite a few of the aggregators are still aligned to a small number of banks and are now having to disclose all their commission structures. They appear to be doing less well, than those who have adopted the best advice model,” North says.

National Brokers Group CEO Steve Lambert says he doesn’t foresee a problem “as long as the brokers understand the service impact of the expectation by the client in charging a fee.”
 
City Pacific Finance’s Stuart Danahay believes brokers who charge a fee will have to offer client’s a better service proposition.

“Consumers will be more accepting of a service fee if their broker provides a diversified finance proposition and is positioned as a ’one stop shop’ for their clients’ financing needs. Such consumers will more clearly see the benefit of the relationship with their broker and will view it beyond the transactional relationship that broadly characterizes the broker industry today,” he says.

“Unless the broker can clearly substantiate that their proposition is significantly different than their competition (and this is also evidenced by overall cost savings), the opportunity to charge a fee will be difficult if their competitors do not follow.”

The onus will be on brokers to convince consumers it’s better to go through them, than direct to banks, says Raine & Horne general manager Gary Lees.

“Those brokers who delve into the fee for service model should be very careful. At a micro level, all due diligence may be conducted on the selection of a clients mortgage (at a fee) only to have the selected bank inform the customer that they could have come directly to the branch, received the same product and at no fee.”