There has been a lot of speculation flowing from the Banking Royal Commission about Finance Broker commissions and in particular whether trail commission should continue to be paid.
However, this misunderstands the role of a Finance Broker and what they bring to the table for their clients and indeed, the Banks!
Finance Broker Myth No. 1 – Commission drives recommendations!
The Finance Broking market has exploded in terms of growth over the past two decades for two primary reasons:
- Brokers provide customers with choice
- The service is highly valued
If the Broker recommendations were driven by commission and not what was in the best client’s interest, then:
- The growth the industry has experienced would not have occurred
- Clients would quickly realise value was not being provided
- The industry would quickly collapse
Added to this is the Banks ability to “claw back” commissions paid if the loan is refinanced or paid out within 18 to 24 months.
Brokers know that if they don’t act in the client interest, and the dissatisfied client refinances, the commission they have been paid will be returned to the Bank.
Whilst we acknowledge the Banking Royal Commission highlighted some poor examples of Brokers who didn’t act in the client interest – these are very much the exception rather than the rule!
If you don’t act in the client’s interest – you won’t survive as a Finance Broker in the long term!
Finance Broker Myth No. 2 – Brokers paid for simply introducing opportunities!
When an individual or business engages a Finance Broker to source finance, it is not just a case of introducing the client to a Bank or entering a bit of information into a computer to receive an upfront commission.
The timelines can be lengthy and involve:
- Gathering an enormous amount of information and verifying the veracity of the same – this also invariably includes liaising with external parties such as Accountants, Real Estate Agents, Valuers, Lawyers, Conveyancers etc.
- Undertaking financial analysis to understand the clients cashflow and serviceability
- Structuring – modelling potential solutions based on understanding the client needs and the options available across the market
- Presentation of the opportunity to Lenders followed by negotiations to deliver an acceptable solution
- Presentation of the Letters of Offer to the client and negotiation around any fine-tuning that may be required
- Managing the process through to settlement
The process involves multiple contacts and/or meetings with both the client and Lenders with considerable sunk costs before any commission is paid.
Banks pay this commission as they are delivered an opportunity without having to bear the long lead times and considerable sunk cost associated with its acquisition. The Finance Broker is a low-cost channel, and a source of immediate new business for the Banks and other Lenders.
Finance Broker Myth No. 3 – Chasing commission and encouraging churn!
The vast majority of brokers only create value in their business by building long-term relationships with their clients.
By extension, this includes helping the client nurture and maintain a long-term relationship with their Bankers.
Changing Banks is highly disruptive and quality Brokers will only suggest this as a last resort if the existing Bank is:
- Unable to satisfy the client need
- No longer market competitive on what they are prepared to offer
The reality is that the differences in commissions paid by Lenders are paper thin and not a material factor. Even if they were, if a Finance Broker is unable to deliver a highly competitive Finance Package because they were chasing larger commissions, then clients simply will not use their service. This would be self-defeating!
Finance Broker Myth No. 4 – Trail is money for doing very little!
In a recent article in The Adviser, James Symond, Aussie Home Loans, Chief Executive Officer said that he “believed that the history of trail commissions had been forgotten and history had already taught industry that large upfront commissions and no trail increased churn”.
However, beyond this as stated above, most Brokers endeavor to build long-term relationships with their clients, in practical terms this involves:
- Keeping up to date with changes in both Bank policy and appetite for different sectors
- Keeping abreast of a client’s changing needs, including Reviews
- Ensuring their offer in terms of rates, fees, terms and conditions remains market competitive
- Educating the borrowers, both business and personal, about finance and the implications of different strategies and products
- And more…..
Delivering this service involves cost which is in part covered by Trail Commission – it is certainly not “money for nothing!”
Finance Broker Myth No. 5 – The choice of Bank doesn’t matter!
Sourcing competitive, and appropriately structured finance, is just part of a Finance Brokers overall value proposition.
A key consideration is the experience and quality of the ongoing service provided by the Bank and Bankers with whom the finance is placed.
The majority of Brokers work hard to build partnerships with Banks and Bankers that are customer service focused and share their values of building long term relationships.
No savings on interest rates, fees or improved terms and conditions will ever adequately compensate for poor customer service.
Being able to connect clients with quality, Banks and Bankers is a critical part of a Brokers value proposition!
The Finance Broking industry has played a critical role providing choice and solutions to both individuals and businesses for the past two decades!
Whilst the Banking Royal Commission highlighted examples where brokers failed to act in the clients’ interest – these, as we have previously stated, are the actions of the few rather than the majority.
The growth the industry has enjoyed is evidence demand exists for the service and in the main Finance Brokers have been successfully meeting the clients’ needs.
When it comes to changes in how Finance Brokers are remunerated care is needed as it could deliver unintended consequences which ultimately will impact the very people (the customer) the Royal Commission is seeking to protect.