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Commissions on superannuation, retail investment and group life insurance products have already been banned and the remuneration of risk insurance advisers is under scrutiny again. Are mortgage broker commissions the next target asks Mark Woolnough
The remuneration of financial advisers has been a major focus for the regulators since the introduction of compulsory superannuation.
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Risk insurance commissions narrowly escaped the axe under the Future of Financial Advice reforms, only to face another round of attack with the recent Trowbridge Report and Financial System Inquiry, calling on the industry to abandon upfront commissions and adopt a fee-for-service model. Once the regulators are done with their current reform agenda, they’ll shift their attention elsewhere. Mortgage broker commissions may be next to face the heat.
The authorities have already voiced their concern over Australia’s surging $1.3 trillion home loan sector, escalating property prices and commissions in home lending.
The level and size of commissions paid to brokers has been steadily rising, prompting the Australian Prudential Regulation Authority to warn last year that large upfront commissions may encourage brokers to pay less attention to loan quality.There are also concerns that the variation in upfront and trailing commission rates, which can be up to 0.3 per cent, could lead to biased recommendations.
While the majority of mortgage brokers deliver a quality service based on the best solution for their clients, the regulators are concerned that varied commissions may influence a minority of brokers to recommend lenders that pay them a higher fee, regardless of whether their offer is the best fit for the individual borrower.
A new way forward
Mortgage brokers are an invaluable part of the home loan industry and we need to ensure sustainability by being prepared for any future regulatory change.
One way for mortgage brokers to protect, diversify and grow their revenue may be to broaden their service and value proposition.
Holistic financial planning is a natural fit and progression for many brokers who already have an intimate knowledge of their clients’ personal situations, objectives and risks.
In addition to mortgage protection insurance and life insurance, they’re ideally placed to provide superannuation and investment advice over time as clients become comfortable with their debt and pay down their mortgage.
A wider and deeper service proposition can help brokers attract new and more valuable clients, diversify their revenue and protect against the risk of a housing market downturn.
The mortgage aggregators and franchise groups such as Mortgage Choice, Yellow Brick Road, Astute, Ballast and Ray White have already identified wealth management as a major opportunity.
They know there’s growing demand for comprehensive advice and if they don’t meet the need, someone else will.
The majority of consumers don’t have the time, ability or desire to manage their own financial affairs. Their lives are busy and complex.
Their personal situation, needs and goals are constantly changing as are Australia’s super and tax rules. There are too many complicated financial products and strategies to understand and compare.
For Australians approaching retirement, they’ll need advice on how to marry the age pension and other government benefits with their super and investments to build a reliable income stream that will last for life. Others will need guidance on estate planning matters to ensure the smooth transfer of intergenerational wealth, of which the family home typically represents the largest part.
According to research by Strategic Consulting & Training, advisory firms with a holistic approach to wealth management will become increasingly dominant because many consumers prefer to engage businesses that provide a range of financial services under one roof.
Logically, consumers are more likely to expand their existing relationship with a trusted adviser, be that a mortgage broker or financial planner, than seek out a completely new one. On that basis, many traditional wealth managers have crept into mortgage broking.
Over the last few years, financial planners have adjusted to charging a fee-for-service for strategic super and investment advice.
They’ve become good at articulating the value they add and at asking to be paid. Many now rebate the commissions they receive on risk and charge the client a fee.
For some, a fee-for-service on mortgage broking is only a step away.
And this is not an issue for mortgage brokers to solve alone. It is equally as critical for many lenders, like ING Direct, who work closely with brokers as a core distribution channel. In the Netherlands, where mortgage broker commissions have been banned for some time, there has been a lot of collaboration between brokers and lenders to enhance the industry’s value proposition and improve the client experience to help justify a fee-for-service.
Locally, if there are future changes to mortgage broker commissions, both lenders and brokers will need to band together to make sure Australians still receive a high level of service.
The industry should start thinking ahead now.
The information provided in this article does not constitute financial advice. Specific advice should be obtained from a suitably qualified professional before adopting any investment strategy.
