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Given the Productivity Commission’s recommendation to abolish trail, we asked NZ Loan Market broker Bruce Patten to reveal how his business managed without trail.
In 2006, New Zealand banks made the decision to remove trail commissions on mortgages. Once the first one moved, the rest followed suit. Payments went from 0.65 of a percentage point upfront and 0.20 of a percentage point trail to an average of 0.85 of a percentage point upfront only.
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Although the increase in upfront income was an offset to the change, a lot of brokers saw it as a backwards step for their businesses, as they were previously being remunerated for looking after the customers on a long-term basis, but the banks saw it as an expense they didn’t need to pay and saw brokers as a lead generation source more than a business partner.
For me, the only reason I got into mortgage broking was to create clients for life and the new model didn’t provide the mechanism to make that viable any longer.
What resulted was a culture of churn in the industry that has meant a number of lenders have now gone back to a trail model 10 years later to try to avoid this happening. Only half of the bank have gone back to trail, the other half are still paying 0.85 of a percentage point upfront only. The banks that have gone back to trail range from 0.45 to 0.60 of a percentage point upfront and 0.15 to 0.20 of a percentage point trail.
However, what the change did for me and my business was to make me analyse how I did business:
- My processes – how we managed our workflow, our clients and increasing our touchpoints with clients to maximise referral opportunities.
- My structure – we reviewed our model and moved towards a larger support team behind me, rather that brokers with support. This is because there was less money to build the business once trail disappeared. I reduced brokers and became the lead broker, increasing my individual volumes.
- I starting looking at add-on products, such as insurance, asset finance and superannuation. Our insurance book is now producing 25 per cent of the income for our business.
All of this allowed me to gain a greater share of a clients’ overall wallet and the by-product was an even higher level of referrals.
Without this change, I might not have expanded my business to such a level, and I would encourage brokers in Australia not to wait for the outcome of the royal commission to look at their business structure and evolve.
