Most companies today, let alone mortgage brokerages, measure their performance via jargon known as KPIs, or key performance indicators, and perhaps the most salient of these in our business is the percentage recovery that each piece of work produces. An industry 'strive' factor here has long been 1% – i.e. if a loan arranged amounts to £300,000 then the broker ideally looks for £3,000 remuneration for his work, income which is usually sourced across three revenue streams – client fee, lender fee and mortgage protection commissions.
My own experience of the last 12 months is that, while lender fees are at record levels and LAUTRO commission rates are holding up, client fees are in relapse. And that begs the question – will client fees of up to 1% soon be a thing of the past?
Let me say now that there is no right answer to the commission vs fees debate because each and every business has its own strategic and financial models that it cherishes. That said, what I do believe is that as a result of an oversupply of product (and lender) offerings and ever-thinning distinctions (and margins) between so called 'exclusive' products and regular high-street offerings, borrowers are increasingly unwilling to pay in excess of 0.5% to a broker for arranging his mortgage. In some cases even less.
At Hamptons International, we subscribe to the 1% overall recovery objective, but rarely to the 1% client fee pursuit. I only ever feel that a fee of this magnitude is plausible if a borrowers' needs are highly complex; arduous to execute or if a broker is enjoying exceptional underwriting and goodwill with a long associated lender/partner. Charging 1% for conventional business is, at best, short-sighted and, at worst, obscene.
It is an invitation to borrowers to take their business elsewhere at the outset or, as is more often is the case, in two to three years time when their mortgage product expires. Even more critically, it can disaffect them to the point that referral business (which is any worthwhile brokerage's lifeblood) dries up.
If client fees continue to reduce (as they surely will in the present buyers market) then brokers will have to be more resourceful and indeed mindful of their clients' true needs. There are too few in our profession electing to raise the subject of mortgage protection which, in an era of diluting company benefits schemes and greater stress in the work place, is just inexcusable. Ignore the commission-earning motive – this is just poor business practice.
In summary, if the oversupply of product in the market continues then lender consolidation will go on with the very real prospect that procuration fees have actually peaked and may even be due for deflation. Advisers may then finally come to realise that, in ethically seeking to protect their borrowers livelihoods they theywould be able to offset a proportion of the commission from this against a client fee that would then appear more constructive. It will be interesting to see how this 'KPI' performs over what I envisage will be the most challenging 12 months brokers will have faced in almost a decade.
KEVIN DUFFY is managing director of Hamptons International
There will always be demand for fee-based advice. Recent regulatory consultation papers have once again shone the spotlight on the future role of this advice. Some commentators have expressed a view that the number of independent advisers may fall because many consumers will be reluctant to pay a fee for advice. Whether the number of independent advisers rises or falls will depend entirely on the final shape of the regulatory environment and advisers' own ambitions and plans for their businesses. It certainly won't be fed by a drop in demand for quality fee-based independent advice.
Paying a fee upfront may not be right for every customer and it's important that customers have a choice. The welcome news of the FSA's recent announcement of support for the 'menu' approach to funding financial advice is testament to that. Indeed, our strategy of providing a fee-based advisory and a fee-free online service is based on the fact that consumers have different needs and requirements and the success of both channels demonstrates that one approach does not suit all. We believe that trends in the mortgage and financial services market will continue to contribute to the demand for fee-based advice.
With market-leading mortgages often coming and going by the day, if not the hour, it's not jenough just to keep up with the market. A leading edge intermediary needs to keep ahead of it. If a customer can secure a deal that means they are paying less for their mortgage than they would if they went elsewhere, then they fully appreciate that good advice may cost hundreds but can save thousands. It's also about service. Getting the right mortgage can save them money and give them peace of mind, but their adviser providing a real hands on service through the various stages of house purchase or remortgage can also save them time and stress. To ensure the best mortgage and to meet and exceed the customer's service expectations, takes considerable resources – training, research, for example. In the vast majority of cases, the commission income is insufficient to support the process. This is why there is a requirement for a client fee and many consumers recognise that they get what they are paying for. From our experience, a one size fits all approach to fee charging is not right – this is backed up by the FSA reaction to CP121 feedback and its support of the 'menu' approach.
It is not as simple as saying that fee charging is bad or commission-only is good – it is important that there is a range of options available within the marketplace so customers can weigh up which approach is right for them. We know from our face-to-face advisory business that if an advisor sits down with their client and demonstrates the value of Charcol's service, and that customer can see that the real or potential savings outstrip the cost (often in monetary terms as well as in terms of time and peace of mind), they are comfortable with a fee-charging approach. What is imperative is complete disclosure (of fees and commission) to the customer and we as a company take great pains in our processes to ensure this is always the client's experience.
Ricky Okey is general manager of Charcol