This week I'm taking a look at network membership fees, together with the list of questions you should be asking your shortlisted networks.
Network fees can be classified under headings of upfront application fee, monthly fees, other recurring fees, percentage of income charges and exit penalties.
A handful of networks charge an upfront application fee. Pink Home Loans, for example, charges £250 but it is the exception rather than the rule. Generally these fees are used to pay for the costs of processing an application according to the rules laid down by the FSA.
For example, there is a requirement for each AR to provide five years' employment history and the network must obtain references from these previous employers. In the event that the application is unsuccessful i.e. the network declines to take on the applicant as an AR, it is unlikely the fee will be refunded.
Monthly fees are easy to understand but check if VAT will be added. And most importantly, what do you get for your money?
Do they include the sourcing system and PI insurance cover? And are these permanent or short-term incentives, such as Sesame's offer to provide Mortgage Brain or Trigold free, but only until October 2005?
If the network does not provide PI cover or makes a separate charge, look carefully into the real cost of PI as it could be a lot higher than you think.
Aside from the monthly fees, check if there are other recurring fees. Guaranteed Home Loans, for example, charges a monthly fee per adviser but also a £500 annual fee per firm. Other networks make a separate annual charge for PI cover.
If you are thinking of joining an IFA network, make sure you are ring-fenced from the investment side of the business. If they end up with a £500,000 fine for the mis-selling of mortgage endowments, you don't want to end up paying part of the bill.
Watch out for any minimum monthly fee. Mortgage Next's monthly fee of £80 may sound attractive to the sole trader but the minimum monthly charge is £250 so that is what they would pay – a far cry from £80.
Almost all networks take a slice of the procuration fees and insurance commissions paid out by the lenders and insurers respectively. This is sometimes referred to, in a derogatory manner, as top-slicing or skimming the fees. Other networks will express it as a percentage of your income, which can range from 5% to 15%.
Where a percentage of income clause applies, check whether this includes insurance commissions as well as procuration fees.
For most networks, the margin they make on the proc fees and commissions is their main source of revenue which pays for the compliance infrastructure, training schemes, marketing and other administrative expenses.
This is no different to the mortgage clubs taking a slice of the procuration fees paid out by lenders. The days when life companies would genuinely pass on the whole of the procuration fee – when they were getting the endowment sales on the back of the mortgage sales – are long gone.
The commercial reality of today's market is that the bulk-buying power of the networks and clubs enable them to negotiate higher fees with the lenders, keep their slice and still pay out more than the brokers would be able to get directly from the lenders.
ARs should focus on the fees being paid out to them and not be concerned about the margins being earned by the networks.
Don't be too distracted by the marketing hype that surrounds the payment of these fees. Some networks will claim to pass on the whole fee and not top-slice. But how do you know this is true before you sign up with the network? Afterwards both the procuration fees paid to the AR and the network will have to be disclosed on the KFI so the truth will emerge but by that time you might have joined the network under false pretences.
And even where the lender pays you direct, it might still be making additional payments direct to the network.
Standing back from the fray, it is important to keep things in perspective and recognise that your network needs to achieve a certain revenue figure in order to pay for the running of its operation; staff salaries and other administrative expenses.
Finally, check the written contract the network must supply you with and scrutinise the exit strategy: period of notice, what happens to pipeline business and insurance renewals and if there are any special penalties.
What to ask the principals
A clear and concise breakdown of all fees charged
Is there a minimum monthly fee?
Is PI cover included or does it have to be paid separately?
A concise list of all procuration fees and insurance commissions available.
Are there any exit penalties?
10 key features of a network
Mortgages – product range and procuration fees (May 24) The lender panel and product range should be large enough to ensure that you are able to select the best products for your clients.
Insurance – product range and commissions (May 31)
You should have access to a good range of products from well-known household names that are easy to sell to your clients.
Point-of-sale quotation system (June 7)
Essential in order to search over whole of market, to provide best advice and to produce FSA-prescribed documents.
Network membership fees (June 14)
What do you get for your money?
Network size, financial standing and culture (June 21)
Track record, stability, and strength through size.
Service standards (June 28)
Fast and efficient processing of all administrative issues including any mortgage packaging and the prompt payment of fees owing to you.
Compliance monitoring (July 5)
Conducted in an efficient manner which causes minimum disruption to your business.
Professional indemnity insurance (July 12)
Mandatory under the FSA rules, but who pays?
Training and competence (July 19)
Are you provided with training and help with exams?
Exit strategy (July 26)
If you decide to leave your principal firm the
break-up should be as painless as possible.