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Settling the debate about the purpose behind trail commission, Gerald Foley, managing director of nMB, tells all.
Speaking on the In Focus podcast, Foley, managing director at aggregator National Mortgage Brokers (nMB), discussed why the banks brought in trail commission and what the future of broking looks like to him.
Foley was integral in launching the major banks into the broking space, having set up the broker channel at ANZ to compete with increased competition from Aussie Home Loans, which was “catching” the major bank, according to Foley.
The rationale behind paying trail commission has been widely debated among the finance industry (and was a particular point of focus during the Productivity Commission and banking royal commission in 2018), with some arguing that lenders did not want to pay out a large sum to brokers upfront, and others saying that it was an incentive for brokers to keep their clients happy with their current lender and cover the costs of providing ongoing service.
Speaking on the In Focus podcast, Foley revealed that he believed “there was always a recognition of [sharing] the ongoing obligation and [sharing] the revenue that’s written off a loan”.
Reflecting on how he viewed trail when he was setting up broker commissions at ANZ, he said: “It was very important that if, as a lender, you were going to invest in the broker channel, you needed recurring income … it was very important that the businesses could continue on covering their costs.”
Foley said that the lenders recognised a broker’s business cash flow could be “lumpy” and that trail commission was therefore brought in to help “smooth out” a broker’s income across periods of time where they were writing fewer loans and earning less upfront income.
He said: “If you take the economics to pay more upfront, then that doesn’t necessarily give the business flow context.
“I’ve forever been a believer that expenditure will always rise to meet income. So, if you give all the income upfront, it might be spent upfront and then you haven’t got enough to keep things ticking over. So I would say that was the key measure.”
The future of broking
As well as reflecting on the history of the broking industry, Foley also provided a vision of what he believes the future of broking will look like.
The managing director said that the residential mortgage broking industry was likely to continue refining its skills rather than undergoing significant changes.
He said: “I wish I could say I can see this magnificent [change]. [But] I think [it’s about] getting better at the way we communicate with our customers, the way we engage, better use of technology, and just keep refining versus some big change.”
Foley said that he was “most excited” about how the broking community “[continues] to leverage off the work of those who have [come] before”.
The industry head, however, said that there was “a lot of growth and opportunity around the commercial SME market”.
He said: “We’re seeing a lot more brokers come out of that space now.”
Speaking on the challenges of the broking industry, Foley said that he was concerned about the lack of skilled bankers in market to help assess more complex scenarios.
“I think … the broader lending industry has just got to develop skills in the lender side,” he told the Mortgage and Finance Leader podcast.
Foley also said that brokers should focus on developing as business owners, noting that many brokers were “accidental heroes” who have historically come from PAYG jobs. As such, he said that nMB has been hosting broker events to walk new brokers through the loan writing process – teaching them how loans are funded, processed, settled, and discharged – and to help them get to grips with being a business owner and manager.
Find out more about how Gerald Foley set up the broking channel at ANZ by tuning into the In Focus podcast episode below:
[Related: MORTGAGE AND FINANCE LEADER: Gerald Foley on the history of ANZ’s broker channel and founding nMB]
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