Brokers clash over fee for service

While many argue an industry-wide move towards fee for service is “inappropriate” and would ultimately spell the “death of the industry”, an abundance of brokers think otherwise.

In fact, many have already implemented a fee for service model within their own businesses, while others are giving the idea some serious thought.

At the heart of the debate is this question: What exactly is the client paying for?

It is here that the water becomes murky.

While most brokers say they would not charge for a simple home loan transaction, if they don’t bill for this, what are they charging for?

Should they charge for their advice? For property management? Debt structuring? Or all of the above?

Different brokers naturally have different views.

To try and gauge these sentiments, The Adviser recently conducted its second annual extensive survey to investigate broker opinions concerning fee for service.

The online survey was conducted in June and more than 400 brokers took part.

For the second year in a row, responses showed that while a vast majority of brokers do not charge a fee, the proportion that do is growing.

According to the results, 26.5 per cent of brokers charge a client fee – significantly higher than the 22.8 per cent recorded in 2011.

But while more brokers this year said they charge for service, those who do not were more adamant than last year about not doing so – neither now nor in the future.

When asked whether they would “ever consider charging a fee”, 62.0 per cent of brokers said they would not – up from 56.4 per cent this time last year.

Interestingly, while a majority of brokers were against fee for service, they would not object to charging a “refundable fee”.

More than 53 per cent of respondents said they would consider charging a fee that is refundable on the client submitting a loan application.

Old concept, new debate
“This statistic is unsurprising, given that brokers always charged an application fee when the industry was born,” says Vow’s chief executive officer, Tim Brown.

“It seems the industry has gone full circle. When I started mortgage broking with Aussie Home Loans in 1996, brokers would not proceed with a loan application until they had collected $300 from their client.

“That fee covered our time and expenses. If the client chose not to proceed with the loan, then they did not get the $300 back. If they went ahead, the commission was paid to the broker thereafter.

“Indeed, fee for service is nothing new, it just faded into the background as fewer and fewer lenders required an application fee,” Mr Brown said.

“But in the early days, that was how brokers made a lot of their money – collecting the application fee. Today, the vast majority rely solely on the lenders to pay them commissions.”

Fee for service, then, is by no means a new concept and a proportion of brokers has always charged a fee – and with great success.

Commercial brokers – such as Vicky Bleathman of Genesis Broking, will charge her commercial clients a fee if she is unable to secure a facility for them after putting in the effort to generate a loan application.

“I enter into a chargeable contract for commercial deals,” Ms Bleathman says.

Laurie Gardner from No Fuss Mortgage adds that fee for service is more than appropriate for “complex commercial deals”.

But while many brokers might believe it is acceptable to charge a fee for complex commercial loans, could this also become the case in the largely residentially-focused broking industry?

The arguments against
There are good arguments both for and against the industry moving towards implementing a fee for service model across the board.

Many who are against the idea believe fee for service will spell the “death of the industry”.

Australian Mortgage Brokers’ Steven Pienaar says an industry-wide move would encourage lenders to stop paying broker commissions.

“I believe the fee for service model is being pushed by banks with another agenda,” Mr Pienaar says.  “Ultimately, it is a way for the banks to make more money and increase their margins.

“The mortgage broking industry will die overnight if the banks stop paying commissions and we have to charge a fee for service. If that business model was ever enforced, I would walk away from the industry.”

Mr Pienaar’s thoughts echo those of many other brokers, including Club Financial Services’ Rob Egan.

Mr Egan worries that an industry-wide move towards charging a client fee would give lenders the perfect opportunity to “cut or severely reduce commissions”.

“The lenders may continue to pay trail, but I think a fee for service model would ultimately encourage lenders to stop paying upfront commissions,” he says.

And very few brokers, it appears, would like to see client fees replace lender commissions.

According to The Adviser’s fee for service survey, 93.5 per cent of brokers believe charging a fee should never replace broker commissions – slightly more than the 91.8 per cent recorded this time last year.

But while many brokers are becoming increasingly concerned that lenders could stop paying broker commissions were the industry to introduce a fee for service business model, Vow’s Tim Brown says the fear is unsubstantiated.

“At present, I simply could not see that happening,” he says. “There is too much competition in the marketplace at the moment for any lender to stop paying commissions.

“If the majors were to stop paying broker commissions, non-banks would see it as the perfect opportunity to continue to pay commission and thus claw market share away from the big players.

“In addition, I think lenders are acutely aware of what brokers do. They know brokers provide a lot more these days than a mere transactional service. They provide advice, debt management and property structure and need to be well remunerated.”

The threat of reduced commissions is not the only concern that has brokers shying away from a fee for service business model; some are worried that a client fee would significantly hurt their volumes.

Indeed, there is a commonly-held belief that if brokers start charging a fee, their clients will simply go direct to a branch, where they know they can get a home loan for free.

“While I believe charging a fee is appropriate in some lending arrangements, if the industry moves to charging a fee for service for all residential lending the banks will ultimately benefit because they do not charge,” MAP Finance’s Mick Idle says.

According to FrontRunner Consulting’s Doug Mathlin, this concern is understandable.

“I often hear from brokers that they are concerned about introducing a fee for service, especially when a large part of their volume is made up of repeat and referral business,” Mr Mathlin says.

“They are nervous about charging a client that they haven’t charged in the past. Ultimately, you have to show them and tell them that you are doing more for them this time around. You need to show them that you are doing more than transacting a loan. You have to do this if you want your borrowers to continue to be an advocate for your business.

“At the end of the day, if your client advocates stop referring you business, you are going to lose a lot more money than you gain from charging them a fee.

“If you are going to charge a fee, it is vital to find out what the customer expects and wants from you – and then you double it,” Mr Mathlin says. “You must make the customer feel as though they are really getting value from you and your services. That is why it is so important to ask for client feedback.

“In days gone by, when fewer brokers were charging a fee, you could provide clients with ‘good’ service. If, however, you start charging them a fee, ‘good’ service is simply not going to cut it anymore. You have to ensure the service you are providing is ‘great’.

According to Mr Mathlin, if a broker can’t prove the service they are providing is better than that of the banks, their clients will ultimately head down the road in search of a cheaper option.

His comments are supported by data from Mortgage Choice which indicate 61 per cent of customers would not pay a fee for using the services of a mortgage broker.

According to the 1,050 respondents polled in the 2011 Mortgage Choice Fee for Service Survey, an additional 24 per cent said they would not even consider paying a fee that was fully refundable upon settlement of the purchase.

“With most brokers currently not charging customers a fee for service, the debate is raising a lot of questions around what the industry’s next move could and should be and how lenders will react if fee for service came into play,” says Mortgage Choice’s chief executive, Michael Russell.

“It is no surprise that the survey respondents leaned very heavily towards not paying upfront for assistance that is currently free. Although more were willing to pay a refundable fee, the findings still left almost one in four refusing to even contemplate reaching into their wallet.

“Brokers need to carefully think through whether our individual businesses and the industry as a whole are in a strong enough position to forego at least one quarter of new business.

“Will consumers who are insufficiently educated as to a broker’s value simply divert their enquiry direct to lenders?”

Mr Russell adds that the survey also showed the mortgage broking industry is not “sufficiently mature” to introduce fees without damaging the industry itself.

“Based on this, other consumer research, conversations with our brokers and the condition of today’s housing finance market, Mortgage Choice is postponing any action on the fee for service front until at least the next financial year,” he says.

“We are taking into serious consideration our findings and will not move towards charging any fee if it puts at risk the business of 24 per cent of potential customers.

“Mortgage Choice’s present focus is on campaigning for improved consumer awareness of the value proposition presented by a professional mortgage broker,” Mr Russell says.

The arguments for
Just as there are many good reasons why the broking industry should not introduce a fee for service, there are also strong arguments for it doing so.

Not only are commissions substantially lower than prior to the global financial crisis – by 30 per cent to be precise – but also credit growth has fallen.

According to a recent JPMorgan-Fujitsu Australian mortgage industry report, Australia's real estate sector is undergoing a once-in-a-generation shift as debt-wary buyers stay out of the market.

Housing loan growth expanded at an average annual rate of 15.2 per cent between 1992 and 2006, spurred by a shift to lower interest rates by the Reserve Bank and the ‘free equity’ created for existing owners by the rising value of their homes.

Since the crisis began in 2007, however, housing credit growth has almost halved to 8.3 per cent, a trend likely to continue through 2012 and beyond.

Faltering demand has brought with it a fall in the demand for home loans, with brokers finding it increasingly difficult to secure new clients and new business opportunities.

In addition, loans are not as substantial as they once were, which has negatively impacted the size of upfront commission.

Many brokers have therefore introduced a fee for service – including Money Links’ director Garry Ross – to compensate for the reduction in commissions and business opportunities.

Mr Ross began charging a client fee in 2007, when the full effect of reduced commissions had just begun to be felt.

“I found I was doing more work for each client and yet my profit margins were dropping, so I decided to implement a fee,” he says.

Mr Ross charged his clients $600 plus GST, but within six months he had increased that fee to $660 plus GST.

“Another four months after that, I lifted my fee again to $700,” he says. “Then within two years, I started to charge my clients on a sliding scale. The clients who required a straightforward ‘vanilla’ loan were charged $700, while the clients whose financial needs were a little more complex were charged up to $1,000.”

That fee might seem steep, but Mr Ross has had no complaints.

“I tell them that there are other brokers out there who will not charge them a fee and give them the opportunity to do business with them, but I have never had anyone leave and go elsewhere,” he says.

“All my clients know exactly what service I provide them with and they understand and respect that it goes beyond a transactional service.

“We give our clients advice and help them to feel comfortable in their financial transactions. We were initially nervous about implementing a client fee, but once we started articulating to our clients exactly what value-add we provide them with, we found everyone was more than happy to pay the fee.”

If brokers are to implement a fee effectively, however, they must know what they are charging for, he says.

“If you are merely helping a client transact a loan, you shouldn’t charge a fee,” Mr Ross says.

“If you are going above and beyond the humble home loan transaction and providing your clients with advice, debt management and structure, then you can charge a fee.”

His comments are echoed by other mortgage professionals, including FYI Group’s director, Sam Ayliffe, who says fees should only be charged by a broker when they are providing a service that is “more comprehensive than a loan arranger”.

“The banks significantly dropped their commissions some years ago, so we are only bridging this gap somewhat whilst offering a more compelling finance and property proposition,” he says.

Western Australia-based broker Maclane Johnson agrees, adding that brokers who belive their service proposition goes beyond what the banks can provide are “100 per cent right to charge a client fee”.

“I charge a fee for debt reduction and ongoing management and support,” The Money Tree broker says.

“Down the track, I am confident that brokers will be forced to charge a fee for service in the same that way that [financial] planners have been forced to.

“In addition, I believe it will be easier for brokers to sell the benefits of their services – much easier than it is for planners. If we can genuinely improve a client’s situation and show that we are offering them value for money, then the client will have no problem paying a fee.

They will not be happy paying a fee if there is no visible benefit. Why should they?”

The value proposition
Even though some brokers believe it would be easy to charge a fee, provided their service proposition beats that of the banks and they can clearly articulate to clients what it is they are paying for, not everyone feels that way.

In fact, according to The Adviser’s second annual fee for service survey, brokers are unclear about which services they should charge for. Even among those who advocate the introduction of a client fee, there is some confusion.

Just over 40 per cent said they would charge for property investment through financing and management, while 20.1 per cent said they would charge a fee for the provision of insurance and superannuation.

When asked if they would charge for their mortgage advice, 47.5 per cent said they would, while 53 per cent said they would be more inclined to charge for debt management.

Interestingly, fewer brokers said they would charge a fee for the provision of advice, with a majority indicating they would charge for debt management and structure.

This finding was perhaps the most telling of the entire survey.

Meanwhile, when asked whether ‘fee for service’ is the right terminology to use, many brokers said it was not and that ‘fee for advice’ would be more appropriate.

Regardless of whether or not you charge a fee – or what you call it – one thing is certain: the debate is not going away any time soon.

As the industry continues its ‘professionalisation’ in the wake of NCCP’s introduction and, more recently, the diploma requirements, more and more brokers are likely to consider charge their clients.

In addition, as margins within the broking industry continue to shrink, brokers will have to look at ways to bridge the ‘pay gap’.

Is the industry ready for a fee for service business model? Will clients accept it, or head straight for the bank? In the coming months, these are questions that will increasingly occupy the minds of brokers industry-wide.

Seconds Out…

<standfirst>

As the broking industry becomes increasingly ‘professional’, many are moving towards charging for providing advice. But is the industry as a whole ready for a fee-based approach? The Adviser investigates

<body>

Fee for service, or for advice, is an issue that has polarised the broking industry.

While many argue an industry-wide move towards fee for service is “inappropriate” and would ultimately spell the “death of the industry”, an abundance of brokers think otherwise.

In fact, many have already implemented a fee for service model within their own businesses, while others are giving the idea some serious thought.

At the heart of the debate is this question: What exactly is the client paying for?

It is here that the water becomes murky.

While most brokers say they would not charge for a simple home loan transaction, if they don’t bill for this, what are they charging for?

Should they charge for their advice? For property management? Debt structuring? Or all of the above?

Different brokers naturally have different views.

To try and gauge these sentiments, The Adviser recently conducted its second annual extensive survey to investigate broker opinions concerning fee for service.

The online survey was conducted in June and more than 400 brokers took part.

For the second year in a row, responses showed that while a vast majority of brokers do not charge a fee, the proportion that do is growing.

According to the results, 26.5 per cent of brokers charge a client fee – significantly higher than the 22.8 per cent recorded in 2011.

But while more brokers this year said they charge for service, those who do not were more adamant than last year about not doing so – neither now nor in the future.

When asked whether they would “ever consider charging a fee”, 62.0 per cent of brokers said they would not – up from 56.4 per cent this time last year.

Interestingly, while a majority of brokers were against fee for service, they would not object to charging a “refundable fee”.

More than 53 per cent of respondents said they would consider charging a fee that is refundable on the client submitting a loan application.

Old concept, new debate

“This statistic is unsurprising, given that brokers always charged an application fee when the industry was born,” says Vow’s chief executive officer, Tim Brown.

“It seems the industry has gone full circle. When I started mortgage broking with Aussie Home Loans in 1996, brokers would not proceed with a loan application until they had collected $300 from their client.

“That fee covered our time and expenses. If the client chose not to proceed with the loan, then they did not get the $300 back. If they went ahead, the commission was paid to the broker thereafter.

“Indeed, fee for service is nothing new, it just faded into the background as fewer and fewer lenders required an application fee,” Mr Brown said. “But in the early days, that was how brokers made a lot of their money – collecting the application fee. Today, the vast majority rely solely on the lenders to pay them commissions.”

Fee for service, then, is by no means a new concept and a proportion of brokers has always charged a fee – and with great success.

Commercial brokers – such as Vicky Bleathman of Genesis Broking, who does not receive lender commission – make their living from charging the client a fee.

“I enter into a chargeable contract for commercial deals,” Ms Bleathman says.

Laurie Gardner from No Fuss Mortgage adds that fee for service is more than appropriate for “complex commercial deals”.

But while many brokers might believe it is acceptable to charge a fee for complex commercial loans, could this also become the case in the largely residentially-focused broking industry?

The arguments against

There are good arguments both for and against the industry moving towards implementing a fee for service model across the board.

Many who are against the idea believe fee for service will spell the “death of the industry”.

Australian Mortgage Brokers’ Steven Pienaar says an industry-wide move would encourage lenders to stop paying broker commissions.

“I believe the fee for service model is being pushed by banks with another agenda,” Mr Pienaar says.  “Ultimately, it is a way for the banks to make more money and increase their margins.

“The mortgage broking industry will die overnight if the banks stop paying commissions and we have to charge a fee for service. If that business model was ever enforced, I would walk away from the industry.”

Mr Pienaar’s thoughts echo those of many other brokers, including Club Financial Services’ Rob Egan.

Mr Egan worries that an industry-wide move towards charging a client fee would give lenders the perfect opportunity to “cut or severely reduce commissions”.

“The lenders may continue to pay trail, but I think a fee for service model would ultimately encourage lenders to stop paying upfront commissions,” he says.

And very few brokers, it appears, would like to see client fees replace lender commissions.

According to The Adviser’s fee for service survey, 93.5 per cent of brokers believe charging a fee should never replace broker commissions – slightly more than the 91.8 per cent recorded this time last year.

But while many brokers are becoming increasingly concerned that lenders could stop paying broker commissions were the industry to introduce a fee for service business model, Vow’s Tim Brown says the fear is unsubstantiated.

“At present, I simply could not see that happening,” he says. “There is too much competition in the marketplace at the moment for any lender to stop paying commissions.

“If the majors were to stop paying broker commissions, non-banks would see it as the perfect opportunity to continue to pay commission and thus claw market share away from the big players.

“In addition, I think lenders are acutely aware of what brokers do. They know brokers provide a lot more these days than a mere transactional service. They provide advice, debt management and property structure and need to be well remunerated.”

The threat of reduced commissions is not the only concern that has brokers shying away from a fee for service business model; some are worried that a client fee would significantly hurt their volumes.

Indeed, there is a commonly-held belief that if brokers start charging a fee, their clients will simply go direct to a branch, where they know they can get a home loan for free.

“While I believe charging a fee is appropriate in some lending arrangements, if the industry moves to charging a fee for service for all residential lending the banks will ultimately benefit because they do not charge,” MAP Finance’s Mick Idle says.

According to FrontRunner Consulting’s Doug Mathlin, this concern is understandable.

“I often hear from brokers that they are concerned about introducing a fee for service, especially when a large part of their volume is made up of repeat and referral business,” Mr Mathlin says.

“They are nervous about charging a client that they haven’t charged in the past. Ultimately, you have to show them and tell them that you are doing more for them this time around. You need to show them that you are doing more than transacting a loan. You have to do this if you want your borrowers to continue to be an advocate for your business.

“At the end of the day, if your client advocates stop referring you business, you are going to lose a lot more money than you gain from charging them a fee.

“If you are going to charge a fee, it is vital to find out what the customer expects and wants from you – and then you double it,” Mr Mathlin says. “You must make the customer feel as though they are really getting value from you and your services. That is why it is so important to ask for client feedback.

“In days gone by, when fewer brokers were charging a fee, you could provide clients with ‘good’ service. If, however, you start charging them a fee, ‘good’ service is simply not going to cut it anymore. You have to ensure the service you are providing is ‘great’.

According to Mr Mathlin, if a broker can’t prove the service they are providing is better than that of the banks, their clients will ultimately head down the road in search of a cheaper option.

His comments are supported by data from Mortgage Choice which indicate 61 per cent of customers would not pay a fee for using the services of a mortgage broker.

According to the 1,050 respondents polled in the 2011 Mortgage Choice Fee for Service Survey, an additional 24 per cent said they would not even consider paying a fee that was fully refundable upon settlement of the purchase.

“With most brokers currently not charging customers a fee for service, the debate is raising a lot of questions around what the industry’s next move could and should be and how lenders will react if fee for service came into play,” says Mortgage Choice’s chief executive, Michael Russell.

“It is no surprise that the survey respondents leaned very heavily towards not paying upfront for assistance that is currently free. Although more were willing to pay a refundable fee, the findings still left almost one in four refusing to even contemplate reaching into their wallet.

“Brokers need to carefully think through whether our individual businesses and the industry as a whole are in a strong enough position to forego at least one quarter of new business.

“Will consumers who are insufficiently educated as to a broker’s value simply divert their enquiry direct to lenders?”

Mr Russell adds that the survey also showed the mortgage broking industry is not “sufficiently mature” to introduce fees without damaging the industry itself.

“Based on this, other consumer research, conversations with our brokers and the condition of today’s housing finance market, Mortgage Choice is postponing any action on the fee for service front until at least the next financial year,” he says.

“We are taking into serious consideration our findings and will not move towards charging any fee if it puts at risk the business of 24 per cent of potential customers.

“Mortgage Choice’s present focus is on campaigning for improved consumer awareness of the value proposition presented by a professional mortgage broker,” Mr Russell says.

The arguments for

Just as there are many good reasons why the broking industry should not introduce a fee for service, there are also strong arguments for it doing so.

Not only are commissions substantially lower than prior to the global financial crisis – by 30 per cent to be precise – but also credit growth has fallen.

According to a recent JPMorgan-Fujitsu Australian mortgage industry report, Australia's real estate sector is undergoing a once-in-a-generation shift as debt-wary buyers stay out of the market.

Housing loan growth expanded at an average annual rate of 15.2 per cent between 1992 and 2006, spurred by a shift to lower interest rates by the Reserve Bank and the ‘free equity’ created for existing owners by the rising value of their homes.

Since the crisis began in 2007, however, housing credit growth has almost halved to 8.3 per cent, a trend likely to continue through 2012 and beyond.

Faltering demand has brought with it a fall in the demand for home loans, with brokers finding it increasingly difficult to secure new clients and new business opportunities.

In addition, loans are not as substantial as they once were, which has negatively impacted the size of upfront commission.

Many brokers have therefore introduced a fee for service – including Money Links’ director Garry Ross – to compensate for the reduction in commissions and business opportunities.

Mr Ross began charging a client fee in 2007, when the full effect of reduced commissions had just begun to be felt.

“I found I was doing more work for each client and yet my profit margins were dropping, so I decided to implement a fee,” he says.

Mr Ross charged his clients $600 plus GST, but within six months he had increased that fee to $660 plus GST.

“Another four months after that, I lifted my fee again to $700,” he says. “Then within two years, I started to charge my clients on a sliding scale. The clients who required a straightforward ‘vanilla’ loan were charged $700, while the clients whose financial needs were a little more complex were charged up to $1,000.”

That fee might seem steep, but Mr Ross has had no complaints.

“I tell them that there are other brokers out there who will not charge them a fee and give them the opportunity to do business with them, but I have never had anyone leave and go elsewhere,” he says.

“All my clients know exactly what service I provide them with and they understand and respect that it goes beyond a transactional service.

“We give our clients advice and help them to feel comfortable in their financial transactions. We were initially nervous about implementing a client fee, but once we started articulating to our clients exactly what value-add we provide them with, we found everyone was more than happy to pay the fee.”

If brokers are to implement a fee effectively, however, they must know what they are charging for, he says.

“If you are merely helping a client transact a loan, you shouldn’t charge a fee,” Mr Ross says.

“If you are going above and beyond the humble home loan transaction and providing your clients with advice, debt management and structure, then you can charge a fee.”

His comments are echoed by other mortgage professionals, including FYI Group’s director, Sam Ayliffe, who says fees should only be charged by a broker when they are providing a service that is “more comprehensive than a loan arranger”.

“The banks significantly dropped their commissions some years ago, so we are only bridging this gap somewhat whilst offering a more compelling finance and property proposition,” he says.

Western Australia-based broker Maclane Johnson agrees, adding that brokers who belive their service proposition goes beyond what the banks can provide are “100 per cent right to charge a client fee”.

“I charge a fee for debt reduction and ongoing management and support,” The Money Tree broker says.

“Down the track, I am confident that brokers will be forced to charge a fee for service in the same that way that [financial] planners have been forced to.

“In addition, I believe it will be easier for brokers to sell the benefits of their services – much easier than it is for planners. If we can genuinely improve a client’s situation and show that we are offering them value for money, then the client will have no problem paying a fee.

They will not be happy paying a fee if there is no visible benefit. Why should they?”

The value proposition

Even though some brokers believe it would be easy to charge a fee, provided their service proposition beats that of the banks and they can clearly articulate to clients what it is they are paying for, not everyone feels that way.

In fact, according to The Adviser’s second annual fee for service survey, brokers are unclear about which services they should charge for. Even among those who advocate the introduction of a client fee, there is some confusion.

Just over 40 per cent said they would charge for property investment through financing and management, while 20.1 per cent said they would charge a fee for the provision of insurance and superannuation.

When asked if they would charge for their mortgage advice, 47.5 per cent said they would, while 53 per cent said they would be more inclined to charge for debt management.

Interestingly, fewer brokers said they would charge a fee for the provision of advice, with a majority indicating they would charge for debt management and structure.

This finding was perhaps the most telling of the entire survey.

Meanwhile, when asked whether ‘fee for service’ is the right terminology to use, many brokers said it was not and that ‘fee for advice’ would be more appropriate.

Regardless of whether or not you charge a fee – or what you call it – one thing is certain: the debate is not going away any time soon.

As the industry continues its ‘professionalisation’ in the wake of NCCP’s introduction and, more recently, the diploma requirements, more and more brokers are likely to consider charge their clients.

In addition, as margins within the broking industry continue to shrink, brokers will have to look at ways to bridge the ‘pay gap’.

Is the industry ready for a fee for service business model? Will clients accept it, or head straight for the bank? In the coming months, these are questions that will increasingly occupy the minds of brokers industry-wide.