Future of commissions

IN 2008, AUSTRALIA’S lenders cut broker commissions virtually en masse by up to 30 per cent. Four years on and commissions are back in the spotlight, but this time for a very different reason.

Commissions have recently come under increased scrutiny, with several industry stakeholders forecasting an increase in the amount brokers get paid.

Oxygen’s managing director, James Green, believes broker commissions could be set to rise in the not-too-distant future as Australia’s majors and non-major lenders aggressively compete for additional market share.

According to Mr Green, the Reserve Bank’s June cash rate cut gave Australia’s non-majors and non-bank lenders the opportunity to come back into the market and steal market share away from the majors through cheaper rates and higher broker commissions.

Following the June cut, all of the majors bar ANZ opted not to pass the 25 basis point rate cut on in full to borrowers and as such, their margins increased.

“By not passing on the rate cut in full, it increased the margins out there in the marketplace, which allowed Australia’s non-bank and non-major lenders to re-establish themselves there,” Mr Green says.

“Already, at the coalface, we are seeing a lot more applications going to Australia’s non-majors because they are not only offering lower rates for borrowers, but higher commissions for brokers.

“I think this enhanced competition and aggressive move by Australia’s non-majors and non-banks will put pressure on the majors to react and ultimately lift broker commissions.”

OTHER INCENTIVES ABOUND

While not all stakeholders necessarily believe the industry will see higher upfront commissions in coming months, they do agree the commission slashing is over.

Liberty Network Services’ Brendan O’Donnell says while upfront commissions have largely “stabilised”, increased competition could encourage Australia’s lenders to provide incentives to brokers rather than reduce commissions further.

“If you are a stable writer with one or more particular lenders, you will be rewarded in one way or another,” Mr O’Donnell says. “Certainly at Liberty, we are not entertaining the idea of commission cuts. In fact, if you meet certain hurdles, we will pay 30 basis points trail in the first year – which is among the best in the marketplace.”

Liberty, however, is not the only lender to reward its brokers with higher trailing commissions. Homeside has revealed there has been a surge in the number of brokers now receiving a 35 basis point trail commission.

NAB Broker’s general manager, distribution, John Flavell, says the lender’s ramped trail program is now celebrating its fifth birthday, allowing some brokers to receive the top trail payment.

“When brokers look at their commission statements this month, they will see that some of their customer relationships are now paying 35 basis points trail,” Mr Flavell says.

“In our estimates, every day, 300 to 400 broker/customer relationships mature and go to the next level in terms of our ramped trail.

“It is a positive for brokers, their customers and Homeside as well.”

AT THE COALFACE

Brokers who have sold Homeside products in the past agree that the ramped trail structure is a plus for them, not only as loan writers but also as small business owners.

“There are no negatives associated with Homeside’s ramped trail scheme,” Crawford Mortgage Services’ Evelyn Crawford says.

“In my opinion, ramped trail is better than flat trail in every way. The longer the client is with you, the more money you earn. Who wouldn’t love that?”

While Ms Crawford says the benefits of putting a customer with Homeside aren’t obvious immediately, as borrowers return to upgrade or purchase an investment property, the bonuses associated with ramped trail become very clear.

“Because Homeside rewards us on client life rather than the life of a loan, when a borrower refinances, upgrades or buys another property and takes out another Homeside loan, our trail payments start where they left off,” she says.

“In other words, if my client was with Homeside for three years and then chooses to refinance or buy again – taking out another Homeside loan – I do not get paid zero trail in the first year as I would if the customer were new to the bank. Rather, I am paid the ramped three-year trail, which is 25 basis points.

“It just adds that little bit extra to my bottom line and helps to increase the value of my business.”

Ms Crawford is not alone in her approach. Navigator’s Michael Platt says the ramped trail structure has also “significantly” increased the value of his loan book.

“I was sceptical at first, because I knew it would take four to six years for NAB Broker’s ramped trail program to come into its own and start paying me the same amount as other lenders. That said, I have been pleasantly surprised,” he says.

“I think where the ramped trail structure really beats the other banks is when it comes time to refinance. Instead of starting from scratch again and receiving no trail in the first year, I can often be paid up to 35 basis points from year one – depending on how long my client has been with Homeside for.

“It is a small value-add that is very much needed in an industry that has been plagued by commission cuts.”

A NEW APPROACH

Mr Platt says it has been good to see some lenders re-thinking their current commission structure in a bid to increase their third party market share.

“Homeside’s ramped trail structure combined with its price for risk strategy makes business sense,” he says. “They not only benefit my customer, but they benefit me as a small business owner.

“In addition, they benefit Homeside because it ensures we do all we can to keep the client with them. Also, by keeping each client with one particular lender for longer, it opens the door to cross sell opportunities.”

Mr Platt adds that he would like to see even more lenders offer commission incentives, including the reintroduction of first year trail.”

“While I think we are adequately remunerated at present, I don’t like the clawbacks and I don’t like the fact that some lenders refuse to pay first year trail,” he says. “We work hard and should be appropriately remunerated.

“I would like to see first year trail reintroduced across the board and I think if brokers continue to use an array of lenders, rather than just sending their clients to the same one or two banks, we could see more competition in the commission space.”