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Consumers deserve the ability to make an informed choice and avoid being conned by ‘wolves dressing up as sheep’, says the managing director of a new cash back model brokerage service.
Independent Mortgage Planners' (IMP) Craig Morgan says his newly-launched business model will succeed, unlike some refund-model brokers.
“We are pro-consumer and independent and we work on a fee for service basis. So our ‘cash back’ is not a marketing gimmick,nor are we cutting off a piece of an already shrinking pie and hoping to survive on what’s left - like Refund was. We charge a fair and reasonable fee for service and, like any professional services firm, can review our cash flow and P&L sheet and adjust accordingly.”
IMP’s cash back home loan is based on the broker receiving an upfront fee from the client with all commission automatically refunded to the client’s home loan. A flat fee of $3,490 is charged to investigate the loan market and offer clients the best deal. After settlement of the loan, commissions are directed into the borrower's property loan account.
“The commission does not ever come to us; it goes directly from the aggregator back to the client’s loan which means that the loan will automatically be paid faster without any extra payments. The upfront commission is received within two months, and typically for a $500,000 loan this upfront commission is around $3,000. We estimate that over the life of a $500,000 home loan around $18,000 of commission is directly paid against that loan.”
Morgan says the fee is a ‘genuine fee for service’, where IMP ‘clearly’ states that they’re working on a pro-consumer basis.
“It is specifically not a success fee. That said, there is a fee guarantee that basically says if, following our analysis, we can’t improve the client's position by more than our fee then they can elect to exit the agreement without cost.”
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With his fee for service model in place, Morgan strongly disagrees that his refund offer devalues his work as a broker.
“If anything, I’d say the opposite if we are talking about a strict fee for service (no commission) arrangement. I pay my doctor, my lawyer and my accountant a fee for service. I can’t think of any profession that isn’t remunerated on a fee for service basis. It is part of why the FOFA reforms for financial planners have been so broadly accepted at the highest levels. They finally have the chance to become a profession instead of being seen as ‘product pushers’.”
In fact, he says, not charging a fee likely devalues what brokers do as the industry tries to perpetuate the ‘myth of a free service’.
“It is demonstrably conflicted and not in the client’s best interests. Clearly the government and ASIC agree - hence s160B of the NCCP Act.”
That said, Morgan believes there will always be a place for the traditional commission-based broker business model.
#pb# “Despite everything I’ve said…I believe there is, and probably always will be, a place for a ‘free’ broking service because of consumers’ in-built ‘purchasing habits’ and prejudices. I just think we need to be mature enough to acknowledge that a lot of broker marketing has sailed very close to the wind with regards to making false claims in the past (e.g. ‘independence’).”
The consumer is going to pay at some point, he points out, whether via a fee for service or in the price of the loan.
“Commissions have to come from somewhere and the online lenders are putting gaping holes in the broker myth that ‘the lender pays our commission - so it doesn’t cost you anything’. We have modelled the opportunity cost of a ‘free’ service - and it averages 10% of the principal value of a 30-year home loan. Consumers deserve to be able to make an informed choice and I’m glad to see new laws that stop the wolves dressing up as sheep.”
