Money now or later? The trailer fee debate

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Ask a handful of mortgage brokers what they think about trailer fees as a compensation model and you'll likely get a mixed response (we did).

Some brokers strongly agree with being paid over a long period time as opposed to getting all the cash upfront. They also see benefits for clients, mainly because of the retention programs trailer fee-friendly lenders offer. However, some brokers like getting paid all at once and are concerned about how trailer commission can be split among associates. They also say any incentive to keep the borrower in one place at renewal time can defeat the purpose of a broker's services.

"Opinions on trailer fees are very individualized," says Marvis Olson, a Calgary-based mortgage planner with Mortgage Architects who is strongly on side with the compensation model. "A lot of people say, 'I want to get paid upfront and I should decide what I want to do with my own money,' but it really depends financially where you're at."

While the issue of trailer fees is contentious, it can be argued that it's not that big of an issue because there are still only two lenders in Canada offering them - Macquarie Financial and Merix Financial, the latter which recently got rid of its upfront payment model completely and now offers two trailer payment options with different splits.

"Our opinion at Merix is that we would love to see another lender jump onboard with trailer fees because it helps validate what we're doing and supports it," says Andrew Kuyper, director of marketing and operations at Merix. "I think the issue you run into in this industry is that there is so much volume being done with the big banks and they have made it clear that they own the customer after they pay that referral fee. So I can't see any of the big banks going with this model as a result - they've already got high retention rates without it."

With that, let's take a look at the issues with trailer fees and why some brokers are for them and others are firmly against.

Commission splitting
The main divide between brokers on the trailer fee issue is the method of payment. Eschewing the traditional upfront model, where commission is paid in one chunk when a deal closes, trailer fees follow the broker throughout the life of the mortgage. A percentage is still paid upfront - for example, Merix pays 90 basis points in its basic trailer fee model - but the remaining points are spread out and another chunk of commission is paid upon the client's renewal with that lender.

Cory McLean, a broker/owner at Verico Axis Mortgage in Lethbridge, Alta., says while he likes the idea of trailer fees ("I can work hard now and be compensated for many years down the road") he doesn't often opt for them because it becomes too hard to split with his associates who pool volume through him.

"The biggest hurdle I have with trailer fees is sharing the splits because all the fees are paid to the brokerage," says McLean, pointing out that he has tried two different ways of fee-sharing: one, splitting all the compensation between the brokerage and associate, and two, allowing the associate to keep the upfront commission and the brokerage to keep the trailer fees.

"If you minimize the accounting, the problem lies with the associates feeling they're not getting compensated nearly as well to write a mortgage with you and they could be going off to somebody else. I think a lot of brokers are keeping the trailer fees in full because if you're sharing the small trailer fee every year it's an accounting nightmare to get it where it needs to go."

Kuyper agrees that splitting commissions can be an issue for brokers who pool volumes with their agents and says an individual focus is encouraged at Merix to avoid confusion and build relationships with brokers. He also points out that to incent individual deal submissions, Merix recently got rid of volume requirements for brokers and replaced them with a 60 per cent funding ratio requirement.

Many brokers are also concerned about whether trailer fees will follow a broker if they decide to leave the network or brokerage they're a part of. Since trailer fees have been introduced in Canada, many networks have agreed to let brokers keep their trailer fees if they leave the network - but not all companies have adopted that policy. To counteract this issue, Merix offers XRewards instead of straight cash and these rewards belong to the originator regardless of their network's policy on trailer fees.

Client retention

Another point of contention with trailer fees is how they affect the client because, in effect, they encourage brokers keep clients with the lender they first signed a mortgage with. This can be seen as positive or negative, depending on who you ask.

Ken Lankin, a broker with Mortgage Intelligence in Niagara, is not onboard with trailer fees because he thinks it's a lenders way of getting brokers "not to bother the client" at renewal time.

"I'm not a believer in trailer fees," he says. "I'd much rather look at refinancing the deal or re-placing the deal somewhere else upon expiration."

While McLean isn't totally opposed to trailer fees - he deals with both Merix and Macquarie and says about five per cent of his deals are compensated this way - he also has qualms about getting clients to simply renew with the same lender when there could be better options available, dubbing it a "passive approach."

"We have a high percentage of clients who come back to us at renewal time and that's based on service and relationship," says McLean. "People are not just signing the renewals like they used to. They don't feel a loyalty to a lender and they're becoming more educated - I think that diminishes the value of a trailer fee."

There is, of course, the argument that placing a deal with another lender at renewal time means more money in the broker's pocket. But Marvis Olson says in most cases she sees this practice as "churning the account" - a term used in the stockbroker industry that means the broker is setting up lots of deals so he or she will get paid more (but to no extra benefit to the client). Olson also argues that lenders with trailer fees have aggressive retention programs that make it worthwhile for a client to stay put.

"They spend a lot of money on their retention programs and they undercut rates," says Olson. "With trailer fees, you're under no incentive to move to a different lender because you're partnering with that lender and you're sharing the client, as opposed to the lender owning the client by paying a one-time referral fee."

In response to the argument that a broker could end up making less money by encouraging a client to stay with a lender instead of shopping around for a better deal, Olson says that in her experience, trailer fees are much more financially beneficial to brokers.

"A lot of people shop, but they really only shop when they buy the house," she says. "At renewal time, they want to take our rate and use it to barter with their existing lender. Nobody wants to go through the hassle of re-qualifying and applying somewhere else - so we provide that rate environment for the clients, but we don't really get the benefit. With trailer fees, it's financially to my benefit if the client stays with the first lender."

What's next?
Both Canadian lenders who offer trailer fees have reported success with their respective programs. Before moving away from upfront payment models altogether, Merix reported 83 per cent of originators were opting for trailer fees. Macquarie Financial CEO Grant Mackenzie told CMP earlier this year that the company was paying out more than $100,000 a month in trailer fees.

In addition, both Merix and Macquarie have partnered with brokerages to release private label products with a trailer fee feature (Axiom is the most recent example of this with its Smart Trail Mortgage through Macquarie). The only other minor player is National Bank, whom Olson says has a partnership with Mortgage Architects to pay trailer fees on its All-in-One product (but only to MA brokers).

"I don't see a big shift toward trailer fees any time soon," says Kuyper. "I think it's going to remain a niche product unless we get more small lenders out there taking a more strategic approach with their originator customers."

And even if the topic of trailer fees remains a divided issue with brokers, there is - at the very least - the benefit of having another option for compensation as opposed to one similar model across the board. And as brokers further share their opinions and reservations about these models, there's a good chance lenders will take notice - and be convinced to come up with more innovative and broker-friendly solutions.

  • Victor on 2009-12-11 1:49:34 AM

    I think there seems to be far too much of a live for today mentality in our industry. Thinking that they make as much money today as one can and wow I am so great EGO's. where as a financial planner first I am just boggled that more mortgage associates don't understand the positive potential that belies these Trailer fees. Counting on RRSP's that as we the Baby boomers retire will inevitably be treated the same way as capital gain tax system and will be taxed separately and thus harder as we all take them out. The trailer fee is an income that will come as long as the customer still pays their mortgage. Think long and hard and take it upon yourself to have the Authority to seek win win for both yourself and your clients. don't just give your business to a lender that won't forward that business back to you. You need to make sure there is enough income or savings in your kitty to survive your life. Have you ever heard of a poverty stricken retired insurance agent??

  • Jo on 2009-12-11 6:50:32 AM

    Any mortgage broker not supporting trailer fee lenders is very short sighted. If we send our deals to merix, macquarie, and various white labels hopefully other lenders will be forced to offer similar programs. Why are brokers sending banks (competition) all the business only to have banks renew 90% of these clients? It just does not make sense, and brokers/lenders need to recognize this trend and start making changes - our business and future depend on it. If lenders want to get more business (and stay in business - unlike Abode) then they need to truly partner with brokers and pay on renewals.

  • Jerry Rose(Verico Allendale) on 2009-12-15 2:14:19 AM

    I fully agree with The comment that all brokers should start sending the bulk of their business to the lenders offering trailor fees or at least avoid sending deals to chartered banks.The banks renew 90% of their mortgages and in the BNS and TD require the borrower to attend one of their branches.I urge all brokers to try and use lenders that source all their business from brokers and try and stay away from chartered banks.

  • tom on 2009-12-15 7:18:19 AM

    Lender's are not stupid and there is no free lunch. If you do a PV analysis, you will find that it is more advantageous to take the money up front.

  • tom on 2009-12-15 7:23:59 AM

    Lender's are not stupid and there is no free lunch. If you do a PV analysis, you will find that it is either more advantageous to take the money up front or the amount is the same. There are also issues as to the value of the goods you recieve ala the Merix model versus the dollar amount represented by the trailer fee. Also, what happens if the lender goes out of business. You have lost all your future earnings. Take the money and run!

  • victor on 2009-12-15 10:29:04 AM

    PV should also be calculated as income per hour of effort. With a secured mortgage (even when they are conventional) there is absolutely no risk of the mortgage company not paying out the entire trailer till it's completion. Before the first cycle of renewal you are ahead of any volume bonus and with any competent financial adviser on your side,your re-invested trailer income will inadvertently grow. unlike volume bonuses that are almost always spent immediately.

  • Jason on 2009-12-15 5:55:13 PM

    If another major lender (firstline, 1stNat, Scotia, MCAP, etc) were to offer trailer fees (or at least payment on renewal) they would probably double their funded volumes within a year and have higher mortgage retention overall. It's crazy that only two lenders are offering this right now when this is the FUTURE!! To all you lenders out there.. get on board before it's too late!!

  • No for Now on 2009-12-17 6:44:23 AM

    Can companies like Merix really compare themselves to the big banks? How long has Merix been in existence for? If it weren't for the mortgage insurers propping these companies up they could go under at any time and in a blink of an eye. If they do, then what would happen to the trailer fees they committed to?

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