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Brokers v banks

Friday, April 15th 2005, 5:54PM 6 Comments

by Philip Macalister

About two weeks ago we heard that the National Bank may be about to cut trail commissions paid to mortgage brokers. So obviously we contacted them to find out whether the rumour was true.

But, as we so often find, the bank said nothing. I find it amazing that still, now that the news is out in the open thanks to Mike Pero Mortgages and NZ Finance - our two listed brokers - that it is still saying nothing, and it hasn't properly consulted with the NZ Mortgage Brokers Association (NZMBA).

The association for its part up out a quite fierce statement yesterday wading into the bank.

"We were told that…the industry would be consulted. While there has been some industry consultation, there has been no consultation with NZMBA and we understand there has been no consultation before release of the final model," it said.

The bigger issue is what is the future of mortgage broking? Clearly the cut in trails from a bank that has generally very well supported by brokers is material otherwise Pero and NZ Finance would not have made NZX announcements.

And should brokers be paid trails? I put this question to NZMBA chairman Geoff Bawden the other day. Well to be true I wound him up by saying I can understand trails being paid to financial planners and investment advisers, but I struggle to see how brokers earn them. The proposition being that once the business is written it's onto the next lead and there is no regular follow-up, and looking after the client until they want another loan (when more upfront commission kicks in).

He countered that indeed brokers do regular follow-ups with their clients. While I am not in a position to know what each and every broker does, it would seem worthwhile that if this is the case they should be telling their story.

In the meantime I can see that the more banks irritate brokers they more likely they are to move their support to lenders such as Sovereign that still pay trails.

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Comments from our readers

On 15 April 2005 at 8:56 pm Sheryn said:

It is interesting to see a change in commission structures. You would expect most lenders to consider changes in a low profit margin environment.

However, I am surprised to see a change to trail, as this indicates to me that the big lenders do not feel that the broker effectively relationship manages their customers, so only need to be paid once, and thats for the introduction of the client to the lender.

Many brokers I have met are very effective relationship managers, and always choose a trail option as this provides continuity of business.

It will be interesting to see how brokers respond, but this is difficult to measure when there are few figures on business volumes to lenders from the broker channel.

On 15 April 2005 at 10:58 pm Steve said:

I am a broker who has always preferred to receive an upfront commission instead of a trail payment - for 2 main reasons ...

Firstly, most brokers I have talked to who prefer the trail payment, do so more for the fact that it adds direct monetary value to their business when they wish to sell it in the future - rather than it ensuring them a continuation of their client relationship.

I am in constant voluntary contact with my client base, but even this doesn't guarantee that they won't just go straight to their own bank when wanting another loan anyway. If so, does this mean I should feel guilty about receiving those trails - or heaven forbid ... return the trail payment ??

Secondly, I have witnessed (and had numerous client feedback to confirm) that once you have introduced your client to their new bank, the bank acts in a manner that constantly and aggressively erodes the relationship you have with your client.

For those brokers who have long since doubted the sincerity of most of the main banks, they should probably be now well positioned for the future.

The trick is - to judge by witnessing their actions - not their words !

On 15 April 2005 at 11:13 pm Sheryn said:

Steve, do you think that commission policy changes will affect your decision on which lender to place your business with ?

On 19 April 2005 at 11:07 pm John said:

I think brokers have bought this outcome on themselves. Firstly, we have endured discussion for a few years now around tight margins in the broker channel, and despite numerous discussions between broker principals and lenders, nothing concrete has ever been done to address conversion rates and quality issues. These two factors are clearly the areas that need attention, and are the one remaining way to increase the profitability of the channel.

There are three parties to the transaction, being the bank, the broker and the customer. Broker remuneration has been at perfectly adequate levels (some would say higher than necessary), Customer benefit is at an all time high ie: rate discounts, price wars, legal fees, airpoints etc. So two of the three factors were maxed out. Clearly under this scenario margins weren't satisfactory to NBNZ. What is their remaining option? no-one's managed to improve conversion and quality, it would be suicide to pump up rates to increase margins, so the only space left to work in is commissions.

NBNZ did some figures, anecdotally I understand that of broker introduced loans, only 20% of rollovers were actioned by brokers. The remaining 80% were actioned by branches. This flies in the face of brokers suggestion that it's the ongoing relationship management that they provide that warrants the trail income. Why would they pay trail with numbers like that?

ASB have never paid trails, but continue to write record volumes of broker business, NBNZ will have looked at this and thought 'why not'. If brokers were so motivated by trail, why the ongoing wholesale support of a non trail lender?

Geoff Bawden is right when he says that it is the customers that put brokers at the table. . But brokers clearly aren't doing enough to keep themselves at the table, or the industry wouldn't be reacting like this. Geoff also says that trail was introduced to prevent churn, which may be the case, but to suggest that as a reason to retain trail in this day and age, is to suggest that the behaviour of brokers hasn't matured since the earliest days of the industry.

Brokers need to stand up and be a professional, functioning part of this industry and sit at the table with the banks and address these issues as partners. Currently the NZMBA and the brokers sit there and get this stuff dealt to them, then whinge about the lack of consultation. Perhaps we as brokers should give our association more money, and work on getting them to that table with the lenders, and when they get there, lets subscribe to a plan of action that will make this industry work for everyone, rather than wait for everyone else to do it….

On 12 May 2005 at 7:24 pm Steve said:

Sheryn ... sorry for the delay ... my simple answer is that so long there is no monetary disadvantage to my client - ABSOLUTELY !!!!!!

On 20 May 2005 at 3:27 pm Budgeting & Personal Finance said:

It is interesting that therre is always two differing opinions. one says let's work together and the other says things will be just fine. It is like the bulls and the bears to a degree.

Commenting is closed



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