The tide seems to be turning for the trailer fee compensation model, which could be due partially to the recent downturn in the economy. The upfront model is great during good times but in slower times, brokers who aren’t prepared may be forced to leave the industry or only work as part timers until the market improves. Opting for a trailer fee has its advantages, especially for those brokers who are in the industry for the long term and who want to grow their business and survive the ups and down of the economy.
BORIS BOZIC
President, MERIX Financial
The compensation model/MERIX
Two lenders have dominated the market -- MERIX Financial and Macquarie Financial -- and both have been gaining momentum over the past five years with their trailer fee compensation model. Both lenders have focussed on developing strategic partnerships with brokers with the intention of helping them grow a book of business over the long term that will sustain both parties during lean times. For all those involved it’s a win/win situation.
At MERIX Financial, Boris Bozic and his team have, over the past year, harmonized its compensation model to offer only the trailer fee model in two different options. Using a five year term as an example, the first option offers 75 bps on closing, then 8 bps on each anniversary date for the next four years. 20 bps is then paid on renewal and every year thereafter for as long as the mortgage is in active status with MERIX. The second option offers 90 bps upfront and 20 bps on renewal for the mortgage and then 10 bps on each anniversary date thereafter during the renewal term.
“With the traditional upfront model a broker is only as good as his or her next deal; what we’re trying to do is help our brokers build a book of business,” explains Bozic, president of MERIX Financial. “We are serious about creating value for the broker community by offering them a recurring revenue stream.”
This model does give the broker more money in the long term and it also creates loyalty between the lender and broker. MERIX, unlike the banks, does not compete for clients. “We only work with the broker channel,” Bozic says. “Once we’ve developed a strategic partnership, there is no reason for us to compete for the customer.”
For example, if an existing customer goes directly to MERIX, the company will do the work for the customer but will still pay the original broker trailer fees. In the vast majority of cases the trailer fees increase because the mortgage amount is increasing. “We are the only lender that we are aware of who does this.”
In addition to harmonizing its compensation model, MERIX has eased up on its minimum volume requirements, looking more at efficiency ratios. “We’re giving our brokers soft targets based on their volumes from the previous 12 months,” he says. “And we’re looking at an efficiency ratio between 70 and 75 per cent. The mortgage originator can control that part of the transaction by picking the right product for the client so there should be no excuse for not having a good funding ratio.”
According to Bozic customer retention is critical. “As long as the mortgage is on the books we all win.” He would also like to see every lender go the trailer fee route because it’s a strategic partnership in its truest form. “There are definite economic benefits for brokers,” he says. “However, banks don’t want to share revenues and once you bring them a customer, they believe they’ve bought them and will compete, not only for mortgage business, but with other products as well.”
Grant MacKenzie
CEO, Macquarie Financial Ltd.
The compensation model/Macquarie
At Macquarie Financial the emphasis is on the trailer fee model with a variation on the upfront model. Its primary five-year rate model offers 75 bps on closing, then 8 bps each year thereafter and 50 bps on renewal and 8bps each year thereafter. The upfront model offers 100 bps on closing and 50 bps on renewal with 8 bps each year thereafter.
One of the greatest benefit for brokers, according to Macquarie’s CEO Grant MacKenzie, is the ability to manage their income, especially during an economic downturn. “Brokers still have money coming in so in one sense it acts as employment insurance or as a company benefit.” And in an industry where brokers can make a sizeable income, using a trailer fee model can help them plan for their financial future.
“Top performing brokers evolve with us and can manage their compensation,” MacKenzie says. “If, for example, a broker earns too much money, they can redirect it. Our trails can be deferred to subsequent years, so now there’s the ability for financial planning.”
What’s more, trailer fees create more enterprise value for mortgage brokerage companies than simply a list of names, since the future trailer revenue can accrue to the business, rather than the individual. This now means that mortgage brokers can eventually sell their practice as a business with ongoing value, instead of just closing up shop and retiring, which is the way it’s been until now.
When Macquarie introduced the trailer model to the market, the company wanted to offer brokers an efficient system that would allow both parties to act as partners in each other’s business and to share customers, unlike the banks who will aggressively go after a broker’s client.
“The trailer fee model has evolved and is here to stay.”
Brokers weigh in
Bill Rainbow
Team Meridian Mortgage Solutions
Invemere, B.C.
The trailer fee model in the mortgage brokerage industry is long overdue. In order to be seen as long term financial advisors mortgage brokers need to be paid as such. Under the trailer model, lenders should give brokers a greater ability to take on a servicing role throughout the course of the relationship as opposed to being put in a situation where we have to place a new mortgage with that client in order to get paid. This allows brokers to build a “book of business” which will give our businesses true value.
This model has served the financial planning industry quite well over the years since all parties involved then have a long term vested interest in the relationship. It also means the lenders are starting to see brokers as long term partners, not just lead generation vehicles.
If you look at the three - way relationship between client, broker and lender from an efficiency standpoint, the trailer model would mean fewer turnovers for the lenders using that program. The second term of any mortgage is more profitable then thefirst and with this model I feel lenders will see more second and third, term mortgages then they do under the current setup.
By changing a client’s perception to one of a unified entity between broker and lender as opposed to one that is potentially antagonistic, for example, when a client is put in the middle of a battle between the broker and the lender’s retention team, our overall image will be far more professional. This would lead to a better client experience and more repeat business for the broker and the lender.
I think trailers are something we will see more of as lenders consider the option. I realize that not all brokers feel the same way about this issue. From what I have seen since I started attending broker advisory board meetings for Macquarie is that this model does attract long term, client relationship oriented, high volume brokers, which is a benefit to any lender.
Bill Nugent
Neighbourhood Dominion Lending Centre
Ontario
We looked at trailer fees a few years ago and found that it is the best way for brokers to build their book of business and create real value. It also creates a steady income stream for brokers and for a broker owner it helps creates company loyalty. When people are desperate for money they can end up doing things they would not normally do, so having a stream of income wards off any potential fraud as well.
With a trailer fee, you’ve created a partnership with a lender rather than a competition with banks with aggressive retention teams. To counter that we have developed our own CRM system to stay in touch with our clients and to build a relationship with them so when it’s time to refinance or renew, then we’re the ones they turn to.
The trailer fee model is something we urge our agents to consider since it looks as if a few traditional lenders may start offering trailers, which would change the mortgage business and create a different platform. There will probably be different expectations for us with regard to minimum volumes and funding ratios. And part-timers will have to pool their submissions and we will probably see fewer of them.
What has been lacking in the industry, according to Mark Goode of with Mortgage Architects based in Orillia, is a way to sustain cash flow and find stability. “With the trailer fee model, brokers can actually budget and start to plan their financial affairs. But it also builds a long term relationship with a lender so it’s a good situation for both parties.”
As a broker, Goode’s role is to help his clients get the best mortgage deal. However, Goode also believes he is equally responsible to the lender. It’s less expensive for a lender to keep an existing client then it is to process a new client. “Trailers compensate us for keeping our clients with an existing lender. The mindset is that the client is “ours” rather than “mine/yours”.”
The ultimate goal is to make money explains Goode so there is a dog-eat-dog mentality among brokers. “We have to look at the long-term viability of our business. Instead of battling with the banks for our own clients we should stop sending them business,” he says. “Then they’ll figure it out. When the banks start losing market share, they’ll notice, and then we can collectively work together.”
