A recent research paper published by the Association of Mortgage Intermediaries (AMI) has shown that income for mortgage intermediaries in 2008 will be 30-40 per cent below 2007 levels, and it predicts that income will remain at 2008 levels during 2009. The AMI research paper, entitled “Credit Crunch – 1 year on: Adapting to a Changing Mortgage Market” also points out that, although the number of mortgage intermediaries has not declined substantially in 2008, significant closures and redundancies are likely to occur in 2009. The research predicts that “incomes are unlikely to return to the peak in the foreseeable future”.
Many readers may well be thinking that they don’t need an AMI research paper to tell them about lower income levels, because they can already see it in their cashflow figures and bank balances. If a mortgage broker’s income is derived purely from lender procuration fees, it is controlled by the market not by the broker. First, it is affected by falling levels of mortgage lending overall. Next, it is subject to whatever lenders are willing to pay (which is clearly likely to be reducing along with the lenders’ decreased ability to lend because of lack of funds). Thirdly, broker proc fee levels are also being reduced by lenders often pricing their products to offer better deals on direct-to-lender products than those that are distributed through intermediaries – thus wooing direct business away from brokers.
In reality, there is no need for broker firms to be caught in this downward spiral of reduced income if they can break away from the restrictions of the old proc fee model of income generation by finding a way to charge customers for the advice and expertise that they provide. This creates an income stream that is additional to the procuration fees funded by the lender and therefore independent of the current system that gives lenders ultimate control over broker incomes.
Expert advice
Our experience of working with single brokers through to larger networks has shown that many customers are coming to brokers for advice having already looked at mortgage comparison websites. They are therefore often well aware of what is available direct from the lenders – but still need expert advice on the best possible deal. In order to remain viable, adviser businesses must start to charge a professional fee for this expert advice to all mortgage customers whether they are recommending a product that pays a lender proc fee or one that does not.
Our work in developing systems that enable brokers to charge a professional fee has shown us that there are three essential elements of a successful fee-charging process. First, adviser firms need to have a sourcing system that is able to compare all direct-to-lender and intermediary products on a like-for-like basis that includes all fees irrespective of whether they are funded by the lender or the customer and shows comparative fees and costs across all suitable product choices. Anticipating the need for a sourcing system that is able to support this radical shift to charging customers a fee, we have all these features now in place.
Secondly, mortgage advisers need an established sales process that prompts the payment of a professional consultation fee and gains agreement to their fee element at an early stage in the sale process, before the specific lenders’ identities have been revealed and the customer potentially walks away with valuable information for which he/she has not paid.
Thirdly, they need to be able to collect their fee during the consultation process to avoid the time and effort it will take to collect the fee at a later date. As consumers now rarely carry chequebooks and are unlikely to be carrying enough cash to pay a professional consultation fee, this (in reality) means that brokers need to have the means to collect payments made by plastic cards.
Sourcing systems
Most mortgage brokers will be familiar with the concept of sourcing systems, so the task will be to find the system that offers the maximum amount of the essential functions at an affordable cost. The real hurdle to overcome is connected with the second requirement – ie, the sales process that includes a customer fee payment as an integral part. Brokers are not used to asking for a fee and don’t know how to start that conversation. We have worked out a guide to this process which is downloadable from our website, and the key suggestions are as follows.
The main point of our suggested approach is to demonstrate to the customer how easy it is to make the wrong choice if you just look at interest rates without taking into account fees and charges. Going back to the point that the broker needs to demonstrate their unique expertise and knowledge of the marketplace without revealing specific lender information to the customer, we strongly suggest that brokers do not use the customer’s own details to work through examples, but rather a “generic” case designed to highlight the various pitfalls.
By searching the sourcing database it is easy to demonstrate that looking for the lowest possible rate could be a recipe for disaster. Brokers are aware that very low rates almost certainly mask high redemption tie ins and/or high fees charged by the lender – a fact that is not well understood by the customer. Thus (for example), a 3.99 per cent two year fixed rate from one lender carrying a five year ERC, could also see the borrower paying up to a 7.15 per cent reversionary rate for the last three years, which would result their monthly repayments rising on average around £265.00.
This is just one example of many, but it powerfully demonstrates that an up front and comparatively modest fee paid to the adviser for expert fact-finding and research could potentially save the customer many thousands of pounds over the five year period. Other pitfalls from which the adviser can save the unwary borrower include paying the last old mortgage payment and the first new one in the same month (a crippling blow to most borrowers’ cashflow), and leaving unnecessary credit search “footprints”.
Agree fee
Having established their own expert knowledge of the whole mortgage market and demonstrated their potential power to save the customer a lot of money, the adviser can then agree a fee with the customer before doing the actual research (based on the customer’s own circumstances) and recommending a mortgage. The adviser can then also offer stage two of the service, which is guiding the customer through the application process - either branch, telephone or web-based.
With techniques built in to their interview process, advisers should also be able to retain the client for general insurance business. For example, if the client decides to make their own application through the lender’s branch, the adviser can coach them to say “my adviser is dealing with that” if the branch staff try to sell them insurances.
On the question of taking payment of the customer’s fee by plastic cards, many brokers do not have a high enough volume of transactions to qualify for an individual plastic card facility arranged by their bank or the expertise to create online systems. Even if they do, individual systems can be costly and time consuming. Recognising these difficulties, we have developed a debit/credit card payment facility that offers brokers a simple and cost effective route to collecting payments, so this element of successful customer fee charging and collection should no longer present a major difficulty.
In general, getting their income from customers is ultimately a much safer way for mortgage advisers to remain compliant with the FSA’s principles, especially in a marketplace where procuration fee-based products are a more expensive option. While these market conditions persist, recommending a procuration fee-based product could always be open to a retrospective charge of bias in the recommendation. Experience shows that customers are happy to pay for good advice so, with the right tools and techniques, brokers should not be frightened by the idea. Instead they should seize the opportunity to develop a business model that will be more fit-for-purpose going forward.
Advisers must now make sure that they receive payment from all customers in exchange for their time, expertise and technology – whether the deal results in a lender procuration fee or not. No other professional adviser would be willing to give away their advice for nothing and mortgage advisers must learn to do the same.
