Business outcomes - The price of advice

The broking industry has undergone enormous change over the last few years. Consolidation, commission cuts, tighter lending policies and fewer lenders have all played a part in reshaping the broking industry.

With legislation drawing closer, the role of the broker will be redefined. The MFAA has already set out its framework for Professional Credit Advisers and with the new level of perceived professionalism comes new opportunities.

The notion of charging a fee for service is not a new one to the mortgage broking industry.

Talk to brokers who were starting out 20 years ago or more, and you’ll find that a fee was often charged to clients in the absence of structured commissions paid by the banks. But most would agree that broker commissions peaked several years ago and while the banks have said that no more cuts are in the pipeline, any further changes are more likely to be downward rather than up.

But fee for service is less about diminishing returns and more about creating client value.

Advice Centre Consulting director David Fox says one of the reasons the fee-for-service model is becoming increasingly popular with brokers is borrowers’ changing attitudes.

In the past, borrowers tended to seek out mortgage brokers to help them choose the best product and rate out of the plethora of products available on the market.

Borrowers are now able to do much of this leg-work themselves, thanks to the explosion of online loan comparison tools. As a result, they are turning to mortgage brokers for more than product and rate advice. Now, they want holistic financial solutions. And they are prepared to pay for it – provided they can see the value in the service their broker is providing. Part of the shift towards fee-for-service also reflects borrowers’ growing suspicion of commission-based remuneration structures.

Mr Fox says the charging of commission indicates to a client that the broker’s advice is influenced by the lenders on its panel and is therefore biased. He says lenders will soon give brokers the option of offering a loan product with or without a commission involved.

FirstPoint NB Financial Solutions director Troy Phillips agrees that many consumers are sceptical of commission-based broker remuneration, having recently moved to a fee-for-service model. Mr Phillips says the response from clients has been “excellent”.

“Some clients feel that a mortgage broker who offers a commission-only fee structure is just a retailer for the banks,” says Mr Phillips.

But the shift to fee-for-service is not just about consumers’ changing perceptions, but brokers as well. He says brokers need to recognise that their time and effort in providing a service is just as valuable as that of any other professional.

“Any broker who thinks his time is not worth charging for should take a good, close look at his value proposition,” says Mr Phillips.

“Clients are willing to pay for quality advice and premium customer service from their mortgage broker, just as they would from their lawyer, accountant or financial planner.”

A FITTING SOLUTION

Mr Phillips says FirstPoint’s decision to broaden its service offering beyond mortgage broking was part of the reason for its transition to a fee-for-service model.

Over the last 18 months, FirstPoint has introduced a new in-house advisory service called FinanceFit, offering clients’ advice, products and support in the areas of financial planning, wills and estate planning, and personal insurance.

“We don’t charge a client a fee if they are merely arranging a mortgage, without the addition of extra services. But where we do provide extra services, FirstPoint’s fee starts from $350,” Mr Phillips says.

CHANGING LANES

Although there are good business reasons for brokers to move to a fee-for-service model, Mr Fox warns brokers not to rush in.

He suggests they start with small steps – for example, continuing to charge a commission but also charging a fee that reflects the value the broker has provided.

For many brokers, this type of hybrid structure is appropriate. For others, another option is to charge a fee based on a sliding scale or calculated as a percentage of the loan value. Offering rebates is another way to get clients used to a fee-for-service structure. Under a rebate structure, the client pays the broker a fee plus an ongoing annual fee, for example – and any trail commission the broker receives from the lender finds its way back into the client’s pocket as a rebate.

CAUTION: SPEED BUMPS AHEAD

A fee-for-service model will not suit all brokers however. FirstPoint’s Mr Phillips warns that it is probably more suited to larger brokerages rather than sole operators.

“Larger brokerages have a scale of key writers and back office support, plus an industry reputation, which enables them to ask clients for a fee in return for service value,” Mr Phillips says.

In addition, Mr Phillips says FirstPoint’s introduction of a non-mainstream product helped validate its decision to charge a fee-for-service.

The fee-for-service model is also well-suited to commercial lending. Money Advisers’ general manager Robert Paul says although the business does not charge a fee for arranging residential loans, it charges a ‘commitment fee’ for commercial lending reflecting the extra work involved. Mr Paul says 99 per cent of his clients are happy to pay the fee because they recognise the effort in the service that is being provided.

“Commercial loans involve a tender that is sent out to the major banks – and this can take a lot of time,” he says.

THE RIGHT SIGN

Mr Phillips says brokers looking to transition to a fee-for-service business model should do so with their customer relationships, rather than money, in mind.

Mr Phillips says if a customer feels they have received a valuable service, they will be happy to pay a fee for it – and will be more likely to give the broker repeat business in the future.

But it’s up to the broker to be able to articulate and communicate to the customer the value in the service the broker is providing.

“Having a fee-for-service model is about showing clients value for their money,” says Mr Phillips.