Broker fees: to fee or not to fee

Transcription

1 Broker fees: to fee or not to fee GreenLight enews article, August 2011 Fee for service has been an issue of much debate recently. Key South Australian industry figures share their views on the current debate. Full transcript, unedited and in the order listed below, of the following contributors responses: Martin Leedham (ML), SA State Manager Australian Finance Group Stefan Lipkiewicz (SL), CEO Bernie Lewis Craig Kitchen (CK), SA State Manager Plan Australia John Rolfe (JR), Retail General Manager HomeStart Finance SL: Before I answer your questions it is important to define what is meant by a Fee Vs a Commission. SL: A fee is transparent, fully explained and the level is agreed with the client. Second if the fee is for ongoing service (yesterday s trail) the fee can be switched off at the election of the client if they feel they are not receiving ongoing advice, service and value. So from a client s perspective it is important to understand that by setting both an initial and ongoing fee one must always consider the total costs for what is being delivered as well as the value it represents for clients. SL: At Bernie Lewis we have clients not customers, a client is someone who elects to receive ongoing advice and service from us and a customer is transactional and usually leads to a one off transaction. Additionally we charge a Fee for Advice not a Fee for Service as it is the advice that we are essentially charging for in addition to application and lodgement services. Customers have come to expect good service from brokers. Will they expect a higher level of service if they are paying for it? ML: Not only should customers expect a higher level of service, they should demand it! In general, I believe the majority of brokers are already providing an excellent level of service and this comes for free to the customer. However, a broker does not get paid if a loan does not proceed and it s a fair assumption that their expertise is worth something recommending a customer do nothing can be just as valuable advice as providing finance for them. ML: If a customer is paying a fee, they have a right to ask what they will be getting for their money. I believe that any broker imposing a fee on a customer must be able to demonstrate a true value proposition, have a service guarantee and provide a service level agreement. If those service agreements are not met by the broker, then under some circumstances, there is an obligation on the broker to refund some or all of the fees paid. ML: The customer should also be ensuring the broker is licensed, is a member of an approved External Dispute Resolution scheme and a recognised industry association and

2 should enquire what experience and formal qualifications the broker has. These are essential credentials of any mortgage broker expecting to charge a service fee to a customer. ML: The fact is, there are plenty of very experienced, successful and well qualified brokers providing exceptional service to their clients that do not want to impose fees. They believe their service and relationships they develop with their clients results in ongoing business and referrals that far outweigh any desire to top up their income with fees charged to the customer. Knowing many of these brokers personally, its not difficult to understand their logic. CK: We call it a fee for advice, not a fee for service. There is a clear distinction between the two as service is the processing of a loan application for which a broker is paid commission by a lender for their time and effort. A fee for advice is in recognition of the independent and impartial expert advice and lender/product choice a broker provides to their customers. SL: Clients always expect fair value, as I do when I use services. Clearly, the level of service varies dramatically from one broker to another. Brokers are not the same so some would need to dramatically improve advice and service to charge a fee. SL: To be able to charge a fee you need to ensure your value proposition delivers value to the client. At Bernie Lewis our value proposition includes the following and we believe that this offers our clients outstanding value and effective long term financial results; - Our brand has been around a while, has 90% awareness and is a brand people trust. - All our Mortgage Advisers have a minimum of a Diploma in FS. - All our Mortgage Advisers have 5 years plus financial services experience. - We believe we provide comprehensive advice which includes a full needs analysis. - We develop an appropriate debt strategy for the client - We provide a statement of advice (SOA) in writing and stand behind our advice. The SOA also highlights the need for clients to consider other important elements such as personal protection, property protection and estate planning. - We then facilitate the application and lodgement process to ensure a smooth experience for the client to achieve their objective. - We also arrange to review the advice with them at least every 2-3 years or more regularly depending on client needs. SL: For all of this we get paid an initial Fee for Advice and then get paid by the Lender to execute the agreed recommended loan strategy for the client. SL: In summary, if you are charging a fee you will need to ensure you can deliver an experience that is more comprehensive and offers the client more value than the current standard broker offering. JR: I have always believed that what people pay for, they value. If something is cheap or free they tend not to value it as much as something they have had to make the decision to pay for. On this basis, I believe the expectation of customers that choose to pay for a Broker s service will be higher than choosing a broker offering a free service. What impact would fee for service have on attracting new customers to brokers? ML: Will customers pay a premium for higher levels of service? Yes they will. If the broker can clearly demonstrate a value added service that the customer is benefitting from, then they will pay fairly for that service and recommend that broker to friends, relatives and

3 acquaintances. Fee for service can actually be a positive point of difference in the broker s customer offering. However, if there is no perceived value and the customer believes they can get the same or better service elsewhere for free, then this will be a deterrent and some brokers may see business diminish. There is also a danger that a fee charging broker who is not able to demonstrate a true added value for their service, will become transactional that means a customer may use them once but not return for any future finance needs. ML: There is some concern in the mortgage broking industry that if fee for service becomes widespread and that fees being charged are not resulting in relative value, then customers will opt to either go direct to banks or do their own research to save money. Unfortunately, customers may limit their options by doing so and may not be aware of all the options available via mortgage brokers. CK: I consider consumers already recognise that when engaging the services of a broker they are receiving a superior offering to what a bank can offer via their proprietary channels. This, together with the understanding brokers are now licensed to provide advice and provide choice of lenders, combines to create an attractive customer value proposition. The feedback from our members over the recent PD days, suggests that very few members reported a loss of clients by the introduction of a fee for advice. SL: Our client research as well as real life experience from charging over 800 fees in the last 12 months, tells us that many see the fee as more professional and transparent and have referred more business to us as a result. Some see the fee as fair but have not changed referral behaviour, while a small portion have decided not to progress with us due to the fee. Interestingly, many of these in our estimation are the same clients that were just shopping us anyway and would never have done business with us just cost us time and money. In this case the fee has become a bit of a quality filter and provides a commitment from the client. SL: In conclusion there is no positive or negative impact on volumes as a result of adding a fee; we are however seen as more professional as a result. In the long term we believe that we will continue to be seen as professional as we will be continually striving to generate value for our clients and as a result will receive more ongoing business and retain more clients. JR: The reason borrowers choose brokers is because they offer choice, options and professional assistance. JR: Introducing broker fees will reduce the number of tyre kickers who use a broker to do the hard work and then either decide not to proceed or approach the recommended lender direct. JR: It may however drive some business, such as budget-conscious consumers who avoid upfront fees, direct to lenders. Will fee for service lead to banks reducing their commissions to brokers? ML: It s not out of the question but I think it is unlikely. Commissions paid by the banks, just like the interest rates and fees they charge, are driven more so by competition and their desire for market share. Certainly the non major banks and second tier funders who rely strongly, if not entirely on brokers for their business, will not be influenced by brokers charging a fee for service. CK: This is why it is important to differentiate between a fee for advice and a fee for service. As mentioned earlier, members are already paid a fee for service by the lenders in the form of an upfront commission. Lender commissions are driven by the comparative cost

4 between distribution channels. If the broker channel is a cost effective and efficient way to distribute mortgages when compared to a lender s branch network, or mobile lenders or online distribution, the lenders will continue to support a broker distribution model. In recent times, we have actually seen commission increase for certain products, and conversion rates. SL: The reality is that a Fee for Advice has no bearing on whether banks change commission structures. The commission reduction that occurred 2-3 years ago was motivated by bank margins and profitability not a fee for advice. Brokers charging a fee for advice or not charging one has no impact on bank margins so therefore no direct bearing on future commission changes. SL: Additionally, some 60% of the Mortgage Broking Industry is now owned to some degree by the banks, so I am not sure why they would want to make changes that have a negative impact on brokers and the industry. SL: If you are suggesting that as fee usage increases some banks will provide more flexibility in commission structures then the answer is, yes. In my opinion I can see a time in the future where commissions will be removed and flexible fee options added at the discretion of the Adviser in consultation with his/her client. The fees will be able to be deducted from the loan but clients will have control in terms of switching ongoing fee s off if they are not happy. In summary, as should be the case, the Adviser will have greater control over the level of fee and therefore their remuneration, providing of course clients get a good result, see the value and are happy with the process. JR: This is a possibility. However the lender commissions paid to brokers are not linked to what brokers earn from a deal, the commission is a payment for what the broker has delivered to the lender. JR: If you had asked me: Should lenders reduce their commissions to brokers who choose fee for service? my response would be no. If fee for service does become industry standard, should there be a flat fee? ML: The fee must always be relative to the complexity of the transaction and the true value add to the client. Market forces will usually dictate what is and isn t acceptable to customers and it may take some time to find that level. ML: Again, if the broker is clear up front about what the fee is, how it is being charged and what the customer can expect in return, then the customer can assess whether the fee charged is fair and reasonable. The customer is free to shop brokers and see what is on offer. ML: At this point in time, I would recommend any customer being charged a fee by their broker to insist on an explanation of why the fee is being charged and what they can expect in return. If they do not perceive value over and above what they would normally expect, then compare what s on offer with other brokers. CK: Each individual broker requires the flexibility within their own business to choose if a fee for advice is appropriate, when to charge a fee for advice, and how much a fee should be. This flexibility is needed to meet the needs of the many different customer types, loan types and business models.

5 SL: We are in an open competitive market with different businesses having different value propositions. Some businesses will look to charge a flat fee other will charge variable fees into the future. I believe that charging a flat fee irrespective of loan size is more logical and effective as the process is really the same whether the loan is for $250K of $800K. We do and should charge more for complex deals that require more work. In other words fee levels should be based on what we do and the complexity of the advice rather than loan size. JR: As in any market, the laws of supply and demand will drive pricing. I am sure that some brokers will charge a higher fee than others, but these brokers will most likely deliver more value to their customers. Price is determined by what the market is willing to pay and what it receives in return. The contributors responses are of a personal opinion and do not reflect the opinion of their employer or HomeStart.