Are Trailing Commissions Money for Nothing?

In what has been described as “an opportunistic attempt to to reduce competition in the Australian mortgage market”, CBA CEO Matt Comyn has disingenuously led the Royal Commission Into Financial Services Industry to form the view that Mortgage Brokers are paid trailing commissions, but not required to do any work to receive them.

an opportunistic attempt to reduce competition in the Australian mortgage market

To help Mr Comyn to better understand the industry at grass roots level, I have prepared for him the following definition of “no work”.

“The No-Work” Carried Out By Mortgage Brokers in Return for Trailing Commissions

  • Maintain a local office to service clients

  • Employ staff to help cater for post settlement service enquiries on loans under management

  • Continuing Professional Education (min 30 hours per year)

  • Maintain Professional Indemnity Insurance

  • Conduct regular client loan reviews

  • Keep the banks honest – negotiate regular interest rate reductions as a bulwark against lenders’ practices of creeping rate margins

  • Assist clients with loan increases/ restructures / loan discharges

  • Prepare client claims on loans with progressive payments (construction loans)

  • Provide financial education via client newsletters and market updates

  • Help clients with debt scenarios and calculations when they are trying to make plans for the future

  • Provide local personalised service where clients do not wish to wait in long phone queues to ask a bank call centre questions about their loan

  • Act as advocates to help clients resolve bank errors to their satisfaction

Notes:

  1. all of the above are done while a Mortgage Broker meets all the costs of running their own business including IT systems (hardware and software), communications systems, stationery, public liability insurance, staff benefits including training, superannuation and annual leave, accounting systems, services subscriptions, aggregator fees, transport, utilities, mail and couriers and marketing.

  2. Trailing commissions provide an important component of cash flow stability which help to keep broking businesses viable, and staff employed in a fluctuating market. They exist for the same reason that bank interest margins do.

  3. Not every broker will do all of the above but then neither is every company CEO as diligent or effective as their industry peers in properly managing their businesses, recognising problems and addressing them courageously and ethically in the interests of all stakeholders.

They exist for the same reason that bank interest margins do.

The events at the Royal Commission this week have been likened to throwing mortgage brokers under a bus. In fact it has become a little crowded under that bus this week.

Thrown-under-the-bus-600x400.jpg

"To throw (someone) under the bus" is an idiomatic phrase in American English[dubious – discuss] meaning to betray a friend or ally for selfish reasons. It is typically used to describe a self-defensive disavowal and severance of a previously-friendly relationship when the relationship becomes controversial or unpopular or inconvenient. (1)

  1. Wikipedia - Throw under the bus

Brittanica or Mark Twain?

Brittanica or Mark Twain?

While the arrangement of finance is central to the process of mortgage broking it is so much more than filling in forms and choosing the lowest initial interest rate. A good broker helps their client with the overall process of buying a property. They act as advocate, project manager, assist with the assessment of financial risk, and liaise with solicitors, real estate agents and the bank's back office to make settlements happen on time.

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