Fee for service mortgage broking and the lender commission model

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Here at Mortgage Advice we are a percentage based fee for service firm (mostly*).  The royal commission and the major lenders, (Hi there big Yellow), think it could be easy for all brokers to switch to a fee for service model.  But it is not an easy thing to do, let alone for a whole industry.   I originally tried to set up using a set fee model, but some files are quick and others are not.  Some people are self employed,  others have multiple casual jobs,  some do overtime and have shift allowances, others may have commissions and bonuses, family allowance, or child support and rental income.  Some are full time with no loading or extras at all.  All of these change complexity one way or another and we haven’t even started on the other variables available in the loan process.  Different lenders assess all of these variables in a slightly different way.   So how do we create a fair experience for all users of our service?  The easiest would be to charge like an accountant on an hourly basis, but people are not yet ready for this and people wouldn’t know the cost upfront.  Perhaps we create tiers of service with a  different set fee for self employed or full time employee.  But then we could end up with 10 or more tiers which is not easy to understand or to explain.  I believe this is why the lenders defaulted to paying mortgage brokers a set percentage commission. Its just easier. 

Also please remember that bank might/should still have to pay some kind of introduction/marketing fee to the broker, as mortgage brokers do their own marketing and have costs associated with acquiring clients – just like any other business. Otherwise, every mortgage broker would be at an even bigger disadvantage with the big players/lenders. This is a point often missed in the debate – As lenders only pay brokers for successful applications. Without consideration for marketing, this would lead to less brokers and less competition, which in turn means the lenders could lift pricing to levels predating mortgage brokers.  I do believe that even with brokers earning trail of 0.15% up to 0.30%, (most lenders are in this band),  the competition they bring to the market probably saves more than this for all consumers,  regardless of channel.  

While commissions are being paid by banks and lenders we will continue to have models that adapt to the clients needs.   We are looking into the set fee models at the moment, but I don’t believe this is the solution for all clients.  Just like our current percentage model isn’t perfect – though I believe it does find a good compromise for most clients in the market.  Just like the current model of commissions is a compromise of ease to clients, lenders and brokers alike.  Remembering that each of lenders different commissions amounts and structures based on their own business model.  The one change I would like to see go is where trail increases the longer a loan is with a bank.  As this gives direct incentive the broker to to not look at other options for the client.  Why should the broker get paid more for bank loyalty?- that should go to the client.  Allow the banks to set the amount and their own commercial terms of the commissions,  but I think this is one that could go 

False documents and misleading applications are functions of brokers/bank staff doing the wrong thing to get paid,  not the method of payment itself.  Brokers get paid commissions and staff  have targets they need to achieve to get wages (and maybe a bonus or small commission) and keep their job. But both channels have had issues with a minority of people making a poor decisions.  So I ask you try to keep the 2 issues separated as they should be.  Most people are do the right thing. 

By being fee for service, (regardless how it is calculated), we can at least promise to try to reduce the remuneration conflict to absolute minimal levels. At the end of the day, we choose to get paid the same amount no matter which lender we choose for our client*, with any further commissions being rebated to our clients. 

* We have clients on commission sharing arrangements as well .  Once again, we did this for ease for both Mortgage Advice and the client. As sometimes the perfect answer is too hard/expensive to administer and that’s not just counting the cost from a monetary perspective. 

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