The findings also revealed that only 3.5 per cent of consumers would be willing to pay a fee equivalent to the average upfront broker commission.
Therefore, Momentum Intelligence concluded that if the ‘consumer-pays’ model was mandated, this would likely prevent consumers from accessing the services of a mortgage broker, subsequently limiting choice and easing competition in Australia’s mortgage lending market.
Momentum Intelligence director Alex Whitlock said a serious implication of the proposed fee-for-service model is that consumers would be naturally driven to their primary personal bank, which is likely to be one of the big four.
As a result, he said this would reduce competition by driving smaller lenders, who rely heavily on brokers, out of the market.
“Fewer lenders will give the dominant retail banks the opportunity to increase their margin by pushing up interest rates. With mortgage repayments and household debt concerns looming, this result could also potentially lead to higher financial distress for Australian consumers,” Mr Whitlock said.
“Whatever the recommendations made in the royal commission final report, the fact remains that customers continue to see the value in using brokers, with recent industry figures showing mortgage brokers settled 59.1 per cent of all residential home loans, the highest broker market share to date.”
Mortgage broker remuneration has faced significant scrutiny in recent years. Much of the attention has been driven by the momentum created by the Future of Financial Advice (FOFA) reforms that reshaped the way financial planners are remunerated.
Comparisons between the two professions are still common. Last year the royal commission was made aware of a letter from former CBA chief executive Ian Narev to Stephen Sedgwick, author of the Sedgwick review into remuneration.
“We agree with the review’s observations that many broker incentives can potentially lead to poor customer outcomes, mortgages fit outside the financial advice framework even though buying a home and taking out a mortgage is one of the most important financial advice decisions an Australian consumer will make,” Mr Narev said.
The royal commission interim report, released in September 2018, raised concerns with the current broker remuneration model.
“While the perverse incentives created by volume-based commissions, which reward brokers for the number of customers placed with a lender, are to be removed, upfront and trail commissions based on loan value remain,” it said.
“While basing those commissions on funds drawn down removes an incentive for brokers procuring a loan larger than the borrower will use, the change does not deal with the more basic problem of borrowers being encouraged to borrow more than they need.”
It added: “Value-based remuneration conflicts directly with customers’ interests.”
However, the commission has also said that bank remuneration and incentives in that arena should also be looked at more closely, stating: “What does require closer consideration, however, is the proposition… that the way in which bank staff are paid does not lead to poor customer outcomes.”
It went on to ask: “What, if anything, is to be done about remuneration of intermediaries? How is a value-based commission consistent with acting in the interests, or best interests, of the client?
“Should intermediaries be subject to rules generally similar to the conflicted remuneration prohibitions applying to the provision of financial advice?”
Two tier model will now entrench
– Middle class servicing will occur via one-off services (as needed) working for large corporates
– SME Firms to focus on HNW and Intergenerational / Familial servicing
The general public isn’t ready for it or the brokers/advisers aren’t ready for it?
This whole fee for service rubbish in the mortgage broking and life insurance space is anti competitive behavior as consumers will not pay for this service/advice out of their own pockets and the banks will just dominate the market through direct sales and online that will lead to poor consumer choice and outcomes in many cases. This stitch up really needs someone to stand up to the banks and big business -with politicians in the pockets of big business- and test them out under the competition and consumer Act.
Fee for service is a con. An absolute gold mine rort. It sounds good, it’s not. You ought to be ashamed of yourselves for defending it.
Anything less than an hourly rate for WHEN you actually do something is disgusting.
Most clients don’t need the service, it’s only your practice that needs the revenue.
Until you stop this rort, FP’s will never be credible sorry.
Defend it all you like, you are wrong. A tiny portion of your clients may need it and I mean tiny. Like 5% maximum.
While I agree you should do work for the money you charge and I believe if you both run a practice this way and have clients who are willing to pay hourly is a great model, this is a very ignorant statement you’ve made. Just because you can’t justify how this cost is determined and it’s clearly coming from the mind of someone who isn’t coping with what is happening in the industry so they need to justify their existance by belittling a completely appropriate practice.
We charge an ongoing service fee this pays for my time and staff’s time to review a clients position every 12 months. This includes reviews of all funds / investments / insurances to make sure they’re all inline with a clients risk profile & needs as this can and most often does change yearly. It also pays the way for us to write Records of Advice or NEW Statements of Advice every year for when we make these changes.
These agreements are opted into every 24 months and Fee disclosure statements sent every 12 months. Like any other business having a “subscription” service helps with our cash-flow yes, but it also means we can provide more cost effective advice.
I can guarantee our ongoing service agreements with our clients will be considerably cheaper per hour spent than whatever upfront “hourly” rate you would be charging them upon each review. Not to mention you’re more likely to provide conflicted advice because you’re going to want to justify charging them for a service to get a paycheck.
You talk about shame, however it makes me very concerned of the advice you provide if you have a “set and forget” mentality. No advice shouldn’t be reviewed yearly. Changing legislation, product updates, clients circumstances are always evolving let alone (as we all know) clients lifestyle goals are ALWAYS changing. What client do you have that has followed a plan to the T, that part way through the year a random purchase / idea / trip hasn’t derailed the plan and what you just don’t address this because hey I got paid upfront, do you really just setup a client with insurances and think hey I got paid I’m good now? Or is it a lack of education on your part that you don’t know why you should be reviewing this yearly?
A lot of clients won’t appreciate the impact changes can have on a plan and yearly ongoing reviews allow for this to be accounted for and explained and the plan UPDATED.
If you actually have a valid reason why I can’t charge an ongoing fee I would love to hear it, I am always open to education and if I’m missing something morally here would love to hear your reasons why. We should all learn from each other, talk of shame doesn’t help anyone or build a better industry which you do seem to want (and I applaud you for).
Go to Freedom Insurance or Real Insurance and set it all up yourself then. See what happens at claim time. Even if somehow you get paid, Slater and Gordon (who you will need because you have neither the time or expertise to handle a claim) will take 30% of the benefit paid anyway.
Lawyers have charged hourly rates for years…. Guess what; they now wish to change to fee for service – fixed price and no hourly billing… get with the times sunshine.
I have been using a mortgage broker that charges an upfront fee and rebates all commissions. Great for me because I get good interest rates (better than the banks discounted offers) I am in front after 2-3 years. I guess it is good for the broker as he gets paid up front.
I think you need to go back to troll school to learn how to write fake comments that aren’t so obviously fake.
Entirely possible with insurance as well.. You just wont see it often as its less lucrative for the broker/adviser so every says “consumers wont pay fees!” when in reality they do if commission is refunded.
Last year, I decided not to offer insurance on a comms basis at all. Fee for service for any client that needed it, or I would refer them to a risk adviser that would do it via comms. I didn’t have a single client take up my offer but plenty were happy to be referred. It works, but it only works when the saving is $3k plus per year. Try it with a couple of first home owners with a newborn and tell us how you go
I offer clients the choice of fees or commission for insurance. The only time they choose fees is when the annual savings exceed the cost of upfront fees. As per your experience, this is generally when savings are $3K or more year. This usually happens at around $10K or more annual premium.
I do, and they do pay a fee no worries in majority of cases. Never underestimate the fee consumers are willing to pay to have their adviser work for them, and not the product provider. You work for whoever pays you.
I don’t think you understand what you just said. The bank pays commission to a broker that way. It does not incur the cost of staff and the branch. Now, you like paying upfront well good on you. Tell me, how long does this broker refund the commission for (each year, month)? The only way you save is for the broker to pay every dollar every year to you – what a hassle, otherwise, you just vfc saved the bank some money at your cost.
Commissions get refunded on a six monthly basis. Happy for you to not believe it is possible, but good luck when the RC report comes out this afternoon.
No problem – thanks for the reply. I will be OK post the RC. I suspect their will be more and more compliance – so the savings you think you just made will vanish in a flash – you will notice this next time you want to refinance or get advice on super etc. Should try that with your Industry Fund – they are charging you a fee for advice even if you don’t use it. If you do use the serrvice, how do you feel about other subsidising you? Shouldn’t you pay for what you use?
In 1980 the same people were saying consumers won’t pay for Financial Advice, and that a commission of 0.6% acted as an incentive for advisers to invest rather than pay off the mortgage.
In 1980 people wouldn’t give up smoking, so why stop selling cigarettes even though it causes cancer.
People can get used to change and getting rid of mortgage broking commisions is a sensible outcome.
This is the same with Insurance Commissions. The advisers and brokers are the only people who can explain the ins and outs of different policies. Whilst im not a mortgage broker i assume its not all about price. Lenders can offer discount rates then jack them up in years to come with high fees to refinance.
Customers comparing both mortgages and insurances on their own will only look at price. They will not compare the 2 products on their actual value. Removing commissions will drive them directly to the banks/insurers and the end result is the customer will be worse off. Commissions for the bank/insurer employees will be called something else such as “productivity bonuses” and clients will be left with JUNK insurance and expensive mortgages.
Very few people have the skill set, time or financial knowledge to accurately assess one product vs another.
Just introduce the Best Interests Duty for ALL FINANCIAL PRODUCT sales, including sales made under the sacm which is General Advice and leave commissions as they are.
If this was the case then every time a sales representative from the ISA network “advised” a client to rollover their super they would be in breach of the BID as the ISA insurance is rubbish and expensive.
I cannot see the BID being introduced for anyone other then the ONLY PEOPLE WHO ACT IN THEIR CLIENTS BEST INTERESTS in the first place – independent advisers/mortgage brokers.
too much common sense… the big guys have deep pockets to pay off our trusted politicians
Adam agree completely! Remember the adage you want three things but you`ll end up with two- Good -Fast- Cheap. If its good and fast it won’t be cheap- If its cheap and good it won’t be fast- If its fast and cheap it won’t be good! So people I believe – will pay for one-off exclusive offers that have a finite time period that given the work required only an intermediary can do for the client – Its good and fast but not cheap- that is they pay a fee!
The only way clients will pay for this service is if they are able to access rates that aren’t available to the general public or going direct. Need to be able to create value rather than simply being able to save and 15min google search for the best rate.
which is why people stay with their own bank for way too long while they get charged higher interest rates….because people are too complacent & think it’s all too hard. That’s why employing a broker & having them paid by the lenders is doubly winning against the banks!!!
Borrowers who choose a loan based on 15 min Google search inevitably end up with a dud product that costs them much more in the long run. It’s the same concept as buying junk insurance over the internet.
Mortgage brokers and financial advisers provide significant value in steering consumers away from dud products that look great online but have many flaws not apparent to untrained consumers.
So long as the product is on their approved product lists????
“As a result, he said this would reduce competition by driving smaller lenders, who rely heavily on brokers, out of the market.”
Just an idea, perhaps they could spend their money on overt advertising to drive business growth, rather than paying hidden commissions to conflicted intermediaries?
They’re hardly hidden. The brokers I work with tell their clients upfront how they get paid & disclose it in the documents they give to their clients.
I was listening to this yesterday on ABC radio & Richard Glover as presenter & his ‘expert’ guest suggested the small banks do the same thing, “just advertise….” but there’s a massive difference between spending millions promoting yourself & hoping that people listen and paying the same amount based on actual getting the business. The first is spending hoping for an outcome, while the second is spending after that outcome has been achieved.
In the same vein, the argument that initial & trail comms on loans are a “cost” to banks that could be eliminated & passed onto consumers ignores the fact that the banks no longer have the branches or staff available to handle all the workload that they have essentially out-sourced to brokers. Why pay staff, spend on premises, support services, etc that are a cost to the bank irrespective of whether they get the business or not, when you can pay someone only when they successfully achieve a positive outcome for your business? It shouldnt be rocket science, but seems like it is for some people…..
Max, when the comms are legally all fully disclosed – please explain how they are hidden ?
Mortgage commissions, like insurance commissions, are fully disclosed prior to application. They are not hidden.
Much of the value mortgage brokers provide to lenders is in the implementation stage, by guiding the borrower through the application, underwriting, and settlement process. This involves a lot of work. Big banks have branch staff to do this, but the smaller more price competitive banks do not. They effectively outsource this to brokers. That’s why commissions are a lender cost paid directly to brokers. It’s also why getting a loan direct from a big bank where no commission is paid is usually at a higher interest rate than via a broker. The cost of maintaining branches and permanent staff is very high and this needs to be recovered through higher interest rates.
Forcing consumers to pay an extra fee for something that is essentially an outsourced lender overhead would be adding to consumer costs unnecessarily. Of course consumers won’t pay it. This would make it much harder for smaller banks to compete, regardless of how much they advertise. They would need to insource the admin functions provided by brokers, by investing in the same sort of branch and staff infrastructure the big banks use. Their costs would go up enormously and competitive pressures on mortgage rates would disappear. A big loss for consumers.
This “hidden commission” lie is now being peddled by fake news Fairfax as well. Seems like there is an orchestrated misinformation campaign behind it.
and i am not prepared to work for free.
and the big 4 banks win the Royal Commision
as designed. ha ha nice one
Was there very any doubt?….solicitors never ask questions they don”t know the answer to…same with banks asking for the RC