A house divided

According to a recent straw poll conducted by The Adviser, 40.7 per cent of the 450 respondents said the future of broking lies in fee for service, while the rest remained unsure.

It is not hard to see why in principle there is support for charging a client fee. In recent years, operating costs have risen, commissions have fallen and the current market is decidedly tepid.

It is understandable that a model which could potentially boost broker revenue is receiving significant industry support.

Also, fee for service is by no means a new concept.

A sizeable percentage of brokers have always charged a fee – and many with great success. Commercial brokers, who in some instances do not receive a lender commission, often make their living from charging the client a fee.

Similarly, finance brokers, investment specialists and some residential brokers – usually those with a few years’ experience under their belt – also charge a fee for their professional services.

But would the client fee model really translate to the residential broking industry and if so, how would it work? And perhaps of greater importance, if brokers do feel their future lies in a fee for service model, are they ready and willing to wave goodbye to lender commissions?

Recently, in an effort to cut through the highly-charged banter and reveal what brokers really feel about fee for service, The Adviser conducted an online survey. The study aimed to clarify what brokers expect and how they perceive the fee for service model. The results were enlightening.

THE SURVEY RESULTS

The Adviser survey, conducted online in May, canvassed the opinions of almost 400 brokers. What was clear from the outset is that there is strong support among brokers for fee for service.

When asked if every broker could charge a client fee in the future, 43.6 per cent agreed. This was mirrored by a figure of 43.9 per cent for brokers who said they are considering charging a fee at some point in the future.

Melbourne Property Finance’s Andrew Tushuizen is one broker who sees merit in the fee for service model.

While he says he dislikes the concept, Mr Tushuizen concedes that fee for service will be critical in subsidising reduced lender commissions.

“Brokers will soon need to charge a fee for service,” he says. “The banks are slowly paring back on their broker upfront and trail payments and this should not be accepted.”

“Ultimately, I would like to see brokers lobby the banks as a whole to ensure sustainable commissions continue to be paid to the third party distribution channel. However, I cannot see this happening.”

But while there is a level of industry support for charging a client fee, when it comes to exactly which services a broker would charge for – and at what price – the picture becomes somewhat hazier.

To try to establish what a fee-based future might look like, The Adviser’s survey gave respondents options regarding which services they might charge for (see sidebox below).

Notably, around one third of the industry believes there is scope to charge the client for transactional activity, such as recommending and submitting a home loan.

Charging for services associated with more complex matters, such as advising on debt structure and management and providing guidance on finance, saw support from more than half the respondents.

Gregory Uehling of brokerage and mortgage consultancy Tandem Uehling says a small fee on top of broker commissions is more than appropriate.

“Broker commissions have been cut a lot in recent years and a lot is required from the broker to get a deal across the line – especially under the newly introduced legislation,” he says. “As such, a small fee on top of commissions is acceptable.”

But what might the broking industry regard as a ‘reasonable’ fee?

When it comes to putting a price to their advice, brokers seem less sure about how to value their services (see sidebox overleaf).

Only half of respondents believe there is scope to charge clients for recommending a loan and submitting an application. Of those respondents, a majority believe a fee of between $250 and $500 is reasonable.

Again, debt structuring and management advice attracted the strongest support for charging a client fee. Only one third of respondents sees no potential to charge clients for this service, while nearly one quarter would expect a fee of between $250 and $500.

Investment property financing and management is perceived as the service that could potentially attract the highest fees, with one in five respondents seeing a fee in excess of $1,000 as fair for this service.

Queensland-based Loan Market broker Ingolf Mueller believes brokers’ services are undervalued compared to those of other professions.

“The giving of advice is currently unrewarded and like anything in life, if it is free it is not appreciated,” he says. “The hours of learning and studies we as brokers have to maintain to remain competent is done for no reward at all.

“If a client was to spend two hours with their accountant on the topic of investment property structuring then the client would pay around $1,000.”

Some brokers clearly feel a fee for service is a reasonable proposition, given the work that goes into managing the client. Michael Platt from Navigator Home Loans in New South Wales also sees some scope to charge a client fee.

“For some brokers it will work to charge a fee and they should feel free to do so. Others would find clients shopping them for information and expertise and then approaching the lender directly.

Mr Platt is among a majority of brokers who are fearful of the potential consequences for the industry of a fee for service model.

“I am tiring of industry professionals who have never conducted a face to face loan interview or been dependant on commission income only for a living commenting on brokers inevitably going to fee for service,” he says.

“I support the option to charge a fee but not the insistence that this is the way of the future.

“But for heaven’s sake, don’t give the lenders another reason to drop commissions – we are still recovering from the last 35 per cent cut.

And there’s the key issue: should the industry move towards a fee for service model at the expense of lender commissions?

When it comes to this crucial consideration, the industry is united. A resounding 92 per cent of brokers do not want to see fee for service replace broker commissions.

So, while there is support – in principle – for fee for service, brokers stand united in wanting to see commissions maintained. This remuneration structure, however, would be under threat should the industry make a collective move towards charging a client fee.

It is virtually inconceivable that residential brokers will be able to charge a client fee and receive a lender commission over the long haul. The image of ‘double dipping’ could tarnish the image of the broker and would be nothing short of a nightmare to disclose to the client.

Therefore, if mortgage brokers are to move to an offering built around fee for service, they will have to be prepared to turn their backs on lender commission.

Choice Home Loans’ Marco Meloni says brokers should not use reduced commissions as a reason to charge a client fee, because the current commission paid by Australia’s lenders is paid at fair and reasonable levels.

Charging an additional fee, when additional service is not provided is greedy, he says. “I believe brokers could and can successfully charge a fee if they do more than provide a home loan and insurance transaction,” he explains.

“The fact is, we are paid well by lenders.

“Sure, commissions have dropped in recent years, but they are still sustainable. If a broker offers more than what a customer could get from a bank, then by all means charge a fee, but if not, then don’t.”

The Adviser regularly questions lenders on their commitment to commissions, and while there are no indications they are likely to rise anytime soon, not one lender has indicated they would look at cutting commissions further – let alone scrapping them.

But there are growing fears that the noise from the fee for service debate could prompt the banks to rethink their strategy.

AFG’s state manager for NSW, Chris Slater warns any wholesale migration by the third party distribution channel towards fee for service could potentially place both upfront and trail payments on the chopping block.

“I can’t speak for the organisations themselves,” Mr Slater says, “but I think if I was the head of one of the major lenders, I would just be sitting back licking my lips while thinking, ‘wow, we have been funding this channel for 15 years and now the customer is going to fund it’.”

So, what conclusion should brokers draw from all this? Certainly, while there is support for charging a fee, the vast bulk of brokers are not prepared to forgo their lender commission.

And while brokers highlight fees of between $250 and $500 as appropriate for their services, charging these amounts would leave brokers significantly worse off than under the current upfront and trail structures – even those of the most frugal lender.

There might, however, be scope for a hybrid approach in which brokers charge a fee that is refunded upon settlement of the loan.

While brokers would not be able to bolster diminished commission returns directly, this strategy could be highly effective in minimising client ‘tyre kicking’, which would in turn translate into increased loan submissions.

Every broker knows only too well what it feels like to put in hours of work assessing a client’s needs, only to have that client pull the plug at the last minute.

Tony Bice, director of Finance Made Easy, says he charges clients a $600 ‘administration’ fee which is completely refundable upon loan approval.

“You’d be amazed at how many times I have had clients come to me for mortgage advice, ask me to run the numbers, find a suitable product and then not proceed with the deal,” he says.

“To combat this issue I started charging a $600 refundable fee. It means that I am remunerated for my services even if the client does not decide to progress any further with the application.

“It is a good faith fee.”

John Paine, broker at Razzle Group, also believes a refundable ‘no go’ or ‘good faith’ fee is entirely acceptable.

“I believe a ‘no go’ fee is the only legitimate fee a broker can charge,” he says. “We have spent time gathering information, compiling options and presenting our findings to the client. If they decide to go to another broker or direct [to the bank] at the last minute, we should be able to charge them.”

Aussie’s Stephen Sillett also agrees that a refundable loan on settlement is the best way to charge, without actually making an industry-wide move towards a fee for service model.

Mr Sillett argues – quite rightly – that borrowers have no problem with paying their lender’s upfront application fee. As such, they should have no problem being charged a similar fee by a broker.

It is critical that the industry seeks greater clarity on exactly how fee for service could and should work.

Moving to a client fee-based model would have significant ramifications for the lending industry overall and both brokers and lenders will watch this debate with interest.

ASIC has already done away with commission for financial planners and the regulator is now eyeing insurance brokers.

Past government meddling with the third party distribution channel has demonstrated a worrying lack of understanding of how this complex channel functions. Can we trust the politicians to legislate when it comes to broker commissions?

If the mortgage broking industry is to continue with this debate it must do so with eyes wide open. As the old adage goes, be careful what you wish for.