Call to put brokers on a fee-only model

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With increased competition among banks and credit unions, one professional believes the move to a fee-only model could be the key to keeping brokers on top.
 
Aaron Vaillancourt of Mortgage Architects is adding his voice to a chorus of brokers suggesting lenders would be more likely to make all of their products available through the channel if brokers were willing to take their compensation through fees charged directly to the borrower. The B.C. broker uses Meridian – that currently has cut brokers out of its promotional 1.49 per cent rate  – as an example.
 
“There is no doubt about the value good and consistent advice provides -- but unless we normalize and enforce a commission structure that various lenders provide us, the unbiased fiduciary value of our professional advice will suffer,” Vaillancourt wrote on MortgageBrokerNews.ca. “This likely won't happen because aligning broker sentiment and behaviour is worse than herding cats. And so, the fee-only model is coming, as it should.”
 
Brokers are permitted to charge fees under the MBLAA, as long as they are properly disclosed to clients.
 
However, it remains to be seen whether or not the regulators would step in to change the stipulations surrounding fees, if they were to become more prominent.
 
Changes to fee guidelines have already been suggested.
 
According to the latest MBLAA review, published in January 2014: Under the regulations, if the principal amount of a mortgage is $300,000 or less, a brokerage cannot require a borrower to pay an upfront fee for services to be rendered. Mortgage brokerages are allowed to charge fees, but if the mortgage is below this threshold, they can only do so after the mortgage has been secured. During the course of the consultation, it was suggested that the threshold for the prohibition against collecting advanced fees for mortgages less than $300,000 be raised to $500,000 to better reflect current, average mortgage amounts and increase consumer protection.
 
However, such a change to the broker model could erode competitive advantages.
 
“If someone is going to save $3,000 in interest payments and they also have to pay a one per cent finder’s fee to brokers to get it, when you offset the additional cost on the fee model, they’re not really going to be saving any money,” Matt McKillen of Mortgage Architects told MortgageBrokerNews.ca. “That’s one of the benefits of going through a broker is having access to all the lending sources and auxiliary products at no extra cost; if customers have to start paying brokers it will dilute our brand and the benefit we give our clients overall.”
  • Ron Butler on 2015-04-14 10:16:00 AM

    I am with McKillen on this one; anyone who thinks charging consumers fees to arrange institutional mortgages needs to give their heads a shake. Set aside the pervasive greed and the craziness of thinking we are the same as investment advisors; here the deal: we have competitors who control 70% of our marketplace and they DON'T CHARGE.

    Honestly, let's quit thinking about ways to increase our incomes on the backs of client and spend more time figuring out how to provide consumers more value and how to develop more new customers instead of focusing on churning our client base.

  • Joe on 2015-04-14 11:57:12 AM

    @Aaron Vaillancourt, your idea has to win this year's CMP award for the "Dumbest Idea of the Year". seriously, you think fee only model is coming? really? and you actually think consumers would choose a broker who is charging a fee vs. a Bank with no Fee? get real dude!

  • Mary Zenar on 2015-04-14 12:14:15 PM

    Clients will never pay upfront fees on institutional mortgages. They barely want to pay them on private mortgages.
    However, there is a huge loss to the institution that underwrites a mortgage application and sends it through their funding process only lose that client at closing because the client found his mortgage 5bsp cheaper elsewhere.
    I'd like to see the institution come up with a solution to keep the client at funding. Perhaps the broker and the institution could split the difference in cost to keep the client, seeing that if the client walks, no one get paid.

  • Broker on 2015-04-14 12:18:52 PM

    Here's an Idea. When you strike an agreement with a lender to promote their services through the broker channel. Add to the agreement that you want access to ALL mortgage products and services available by the branch. Call me crazy but I think this would solve one of the issues here.

  • Another Broker on 2015-04-14 12:58:37 PM

    Financial advisers charge consulting fees. There is no reason why a broker shouldn't be able to if that is their model. If the client gets their mortgage through you, you just rebate the fee. Simple. Consulting fees are probably the only way to ensure clients get truly objective advice.

    On a related note, some provinces like BC have outdated rules that prevent consulting fees. I think MBABC petitioned against this but there has been no action yet. FICOM needs to get with the times and update its advanced fee restriction.

  • Aaron Vaillancourt on 2015-04-14 1:05:00 PM

    In a declining rate environment, full broker commission (of approx 20 bps per year of term) now represents nearly 7-10% of the interest a borrower pays. 10 years ago, it represented less than 4%.

    The fee-only model isn't just coming, in many ways its already here. Rate sites are already actively trying to determine the minimum a 'broker' will work for, and lenders are attempting to do the same via allowed buydowns and 'special offers'. The fees aren't yet being charged to the client - for now they're being charged to the broker. But eventually somebody will advertise 'zero-finders' rates (via buydowns, or commission pass-through to the client) and make their money via fee only. Perhaps this will just be a processing fee, or perhaps it will be an hourly rate. And, when the dust is settled and the APR is calculated (fee-in of course), the client will come out ahead. The challenge, as others have noted, is conveying this value to the client. Fee-only financial advisors say this is the hardest part of their business.

    Our profession provides two functions: Advice and access. The income we derive from these functions has always paid for both. But technology is eroding the value of access, as is should. The challenge is to still be able to charge for unbiased advice, which is still VERY valuable, and which clients clearly need and want.

  • Don Johnstone on 2015-04-14 1:08:40 PM

    The only way that "fee only" mortgages will come into effect is by legislation and what government is going to introduce fees to consumers. It is a non-issue. Banks will be banks, competition will be competition. Don't expect nor give quarter to them. Banks will continue to have proprietary products and some customers will bolt at the last minute for a few dollars.

  • mat on 2015-04-14 1:09:30 PM

    Its funny how this website uses the comment section to provide content/headlines. Its even funnier when they are really bad ideas like Aaron's fee model... on a side note i'm hoping to make headlines!
    "one broker feels like we can't come up with content unless its a bad idea" says mat...

  • mat on 2015-04-14 1:09:32 PM

    Its funny how this website uses the comment section to provide content/headlines. Its even funnier when they are really bad ideas like Aaron's fee model... on a side note i'm hoping to make headlines!
    "one broker feels like we can't come up with content unless its a bad idea" says mat...

  • mat on 2015-04-14 1:09:36 PM

    Its funny how this website uses the comment section to provide content/headlines. Its even funnier when they are really bad ideas like Aaron's fee model... on a side note i'm hoping to make headlines!
    "one broker feels like we can't come up with content unless its a bad idea" says mat...

  • Ron Butler on 2015-04-14 1:28:52 PM

    Brokers may think that their advice is VERY valuable, but here's the advice most brokers have in their arsenal for 90% of "A" mortgages: Fixed or Variable, here are the features of each, avoid collateral mortgages and high penalty products and once a quarter we will call you and remind you to make pre-payments but really to pepper you with reasons to refinance so we can churn the client.

    Seriously now: critical advise about a LOAN, puh-lease. An investment advisor has to master a huge universe of products and become a tax guru to serve their clients in a meaningful way, most don't but the great ones have a daunting learning curve and relentless study. There is no comparison in depth of complexity a good investment advisor has to master compared to a mortgage broker and guess what; the public don't want to pay investment advisors a fee either.

    Don't get me wrong, for specialized situations on the B side or construction or multiple investment properties mortgage brokers can offer true expertise but for the 70% of the plain vanilla situations there is not a heck of a lot to tell consumers other than the 3 or 4 things I sited. We would all be wise to drop the pretence of being Sherpa guides up the Mount Everest of mortgage complexity and concentrate on better rates, even faster turn-around and communication convenience.

  • Henry on 2015-04-14 1:55:33 PM

    Funny, why a client will pay a fee to broker if he can get the mortgage without fee but just walking to the branch

  • Don Johnstone on 2015-04-14 1:55:43 PM

    Ron, yes I agree, on plain vanilla mortgages there is not much you and I can tell them. Explain the options and make sure they pick something they are comfortable with. However please do not make light of that fact that we explain the vast difference between fixed and variable if rates rise, the dangers of a collateral mortgage, and high penalties from some banks. It may not seem like much but you know what? We are the only ones telling them!! If I did nothing but get my clients a great rate and help them to avoid a few financial landmines along the way then I have done my job. I may not be a Sherpa guide or a financial guru but hopefully my clients and yours as well find that dealing with us has been beneficial. I meet 99% of my clients face to face. I spend a lot of time getting to know them and building trust and rapport.

  • Ron Butler on 2015-04-14 2:06:12 PM

    Don, all I would suggest is that most of the things you tell people (and good on you for doing the right job) are very available online and finally although I am sure you do fine work, especially with your emphasis on getting a great rate but a lot of what you describe is really salesmanship not expertise that someone needs to pay a fee for.

  • Jim Thornton on 2015-04-14 2:36:56 PM

    Paying a fee for a regular mortgage and thinking that the client is going to win in the end is not accurate. What about the situation of a first time buyer that now has to come up with their 5% plus another $2,000 for a fee. How does the client win there?

    Having been a Financial Advisor for 12 years, I can tell you that a large number of the so called advisors that charge a fee say they are doing it because it is better for the client. However, I never met one advisor in 12 years that switched to the fee-only model because they wanted the client to pay less fees (and make less money on their own). The fee only model always resulted in making more money with their existing client base. It's just a marketing gimmick in my mind. A good advisor is one that will do the work to build a portfolio for you. Most advisors, don't want to spend the enormous amount of time it takes to do that because if they did, their hourly rate would go way down.

    There is no way that brokers will increase market share by charging fees. Clients want the quality advice, but very few are willing to pay for it out of their pocket.

  • Don Johnstone on 2015-04-14 2:37:51 PM

    Ron, if fees had to be charged to make any money it would be the death of mortgage brokers. I would not expect a client to pay me a fee for something they could get a branch for free. I am just saying do not belittle the seemingly simple advice we give clients. I see clients everyday who were SOLD and inferior product with a non-competitive rate and were not even given a cursory explanation of the product they bought. I understand your business model predicates that you take the position that a mortgage broker adds nothing to the transaction and that a low rate from an online broker meets the needs of everyone. I humbly disagree. Educating my customer on the details of his mortgage and pointing out pitfalls and things to avoid is not salesmanship but is my responsibility.

  • Ron Butler on 2015-04-14 2:57:04 PM

    " I spend a lot of getting to know them (99% face to face) and building trust and rapport" Don, I don't know any other way to describe that statement except "salesmanship"

  • Don Johnstone on 2015-04-14 3:48:01 PM

    Ron, yes building trust and rapport is to a certain degree "salesmanship. You however stated that the educating of my customers about such things as variable vs fixed, collateral mortgages and onerous discharge penalties was "salesmanship". On that point I disagree.

  • Mortgage Teacher on 2015-04-14 11:44:40 PM

    Ok Ron and Don, great points and informative thread, but back to the point on hand here...lol

    Back to the top where "Broker Brand" was mentioned here. Don is right, fees would be the death of the Broker in the consumers eyes.

    Clearly with the online marketing battle, typically, he who gets them in the door first...WINS.
    Now with consumers looking online, it allows us true professionals to have a voice....and be found. unlike an employee of the bank. Have you even tried to get through to a person at your local branch??... 1-800-RETENTION screens that call all day long.

    I personally wouldn't have our brokerage charge fees, I feel set fees will kill the one advantage us brokers have: Trust.
    Whether you call it "Salesmanship" "advice" face to face.... it all breaks down to a good "relationship".. we don't get "promoted" to other cities, I am still sitting right here when the clients come back in 5 years, relationships matter.

    There is no logic in our industry to start charging fees, but hey Aaron let me know what city it starts trending in, I would love to set up a marketing campaign there.. hehe

    sorry if I seem harsh on the "no logic" on a brand perspective, but thats my opinion... not to mention charging fees totally opens the door to fee for service, and no longer HST exempt!.... I don't care to have another 13% of my overall cake taken, I like cake ;)

    #shopsmart
    MT

  • Blair Anderson on 2015-04-15 8:48:28 AM

    Interesting forecast Aaron. Mortgage brokers as financial advisers is a concept many professionals in the industry work to emulate. It only offends, or threatens, the minority group of brokers who can only focus on one thing…rate. Interesting times.

  • Dennis Rajewski on 2015-04-15 1:03:24 PM

    When I started in this business, no one paid us fees. Fees were charged to the client by the broker and guess what? THE BROKER was the lender of last resort. Clients now look for THE lowest rate, they will also search for the lowest fees. Wouldn't you? Guess who wins? Bye bye broker as Ron Butler said.

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