The question of whether to charge fees can literally be life or death for some firms who face a central conundrum - should they charge and risk losing clients or rely solely on proc fees?
Once upon a time, brokers’ lives were relatively easy with proc fees aplenty and mortgage deals abundant. It was a win-win situation. The client was delighted with a free service and the broker was happy to arrange the mortgage and move on to the next borrower. Quick turnover and volume were top of the agenda.
Then came the crash and brokers couldn’t succeed by dealing with clients in the same disposable, transactional manner.
Cross-selling of protection, general insurance and life assurance, so long ignored, have now become integral features of a broker’s day job and has helped some to survive the recession.
Meanwhile, the collapse in overall volume has been compounded by direct-only deals from lenders.
On top of this there were falling proc fees at major lenders last month. Barclays, The Mortgage Works and Lloyds Banking Group all lowered their proc fees and rumours are rife about further drops in the coming months and years.
Data from the Financial Services Authority shows the percentage of mortgages arranged via brokers rather than direct fell below the 50% mark in the first three quarters of 2009, the first time since 2005. Cross-selling was not enough and something had to give if brokers were to adapt and survive, so the market has diversified.
The question of whether to charge fees can literally be life or death for some firms and they face a central conundrum. If they charge fees they could scare off clients and if they don’t, they are suffering falling proc fees and losing business to direct deals.
But a recent straw poll by Mortgage Strategy Online revealed that 71% of brokers are now charging clients. This is an increase from the 64% recorded in the Mortgage Strategy broker census last year and shows that an increasing majority are charging fees.
It is a tough call to make and many successful brokers and firms don’t charge fees. These include London & Country, which believes there is still a market for fee-free advice.
“In some ways, not charging a fee has become part and parcel of our brand identity,” says David Hollingworth, head of communications at London & Country.
“If you can get quality advice without incurring a fee then that will appeal to some people. We always make our clients aware of direct deals but we can’t advise on them.
“One thing that does annoy us, though, is when the quality of our advice is questioned by not charging a fee.”
Last year Which? launched a fee-free, commission-free mortgage advice service available to its members.
The consumer champion says it will pay brokers a salary to offer whole of market telephone-advice including direct deals, with no product commission. It says any proc fees will not be taken by advisers and instead used on campaigning work for Which?
The Association of Mortgages Intermediaries questioned the reliability of the salary model and compared to that used by Equitable Life.
Speaking at last year’s Mortgage Business Expo in London Robert Sinclair, director-general of AMI, told delegates that Which? is being brave because it is trying to promote something good for consumers, but it is also making a commercial move.
Which? has previously defended its model and says commission will not influence the mortgage recommendation its advisers provide and on many occasions, it will receive no commission. It won’t charge a fee for its advice but if a customer feels more comfortable paying, it offers that option, offsetting it against any proc fee.
Chris Gardner, commercial director at Which?, says it is a limited service being piloted and no decision has been made on whether to roll it out.
“We felt that it was important to offer consumers a service they didn’t have to pay for,” he says. “We are very careful not to use the word free, because it is paid for but through proc fees rather than the consumer.
“We didn’t feel we needed to charge fees and we hoped the demand would mean we wouldn’t need to charge additional fees. It’s one of the things we are testing in these first few months.”
Gardner says he has been very encouraged by demand and the ability to attract people but doesn’t know whether it could be a model for the market.
“It’s important for us to say that we will advise on every available mortgage, including direct, and that we have no self-commission,” he says. “Whether the market goes in that direction is too early to say but we had an eye on the future with our model. We thought it was the best place for Which? to be.”
The Which? pilot, as yet unproven, is an interesting proposition and a potential alternative to the growing number of fee chargers.
Martin Lewis, founder of MoneySavingExpert, believes that charging upfront fees before any information is given could limit access to advice, but he’s sympathetic to why increasing numbers of brokers are doing it (see box).
Many firms are biting the bullet and charging fees as a way of increasing revenues.
This may reflect changing consumer attitudes towards paying for advice such as in investments and pensions. Mortgages already incur fees for valuations, legals and products, so borrowers may not be as resistant to paying an extra broker fee.
Although the Mortgage Market Review is unlikely to affect proc fees or the remuneration model of brokers, it could enact a cultural change.
John Malone, executive chairman of PMS, says he expects more intermediaries will charge fees for advice this year.
“With proc fees more likely to be maintained than increased and the average sum assured being less than a few years ago, intermediaries must look to improve their income and that starts with charging clients,” he says.
“Although we are not likely to see significant changes in the MMR on proc fees and protection income.
“Those intermediaries who act within the Retail Distribution Review will see more clients understanding the benefit of a long-term relationship with financial advisers.
“I think the RDR will help to concentrate the minds of all intermediaries and therefore it will help those clients just wanting mortgages and protection realise there is a fee-paying proposition in the marketplace.”
While a cultural shift among consumers would make charging fees easier, there is also the practical requirement of financial advisers working across different markets. Many brokers may think it makes sense to harmonise the fee charging across their businesses.
Rob Roberts, head of mortgage services at LIFT-Financial, is one such broker and he says it is changing its mortgage fee structure to bring it in line with investment and pension advice.
“We have split our processing into two parts,” he says. “First, we will charge an upfront fee of around £199 to £250 for fact finding and a fully sourced recommendation from the whole of market including direct deals.
“Clients can use that information to arrange the deal themselves but if they want us to arrange it, we want a minimum of £750. But if the deal involves a proc fee, then we will offset that against the fee we charge the client.”
So if the proc fee is £750 or more there is no arrangement fee – if the proc fee is £500, Roberts charges the client £250.
Private Finance generally charges 0.5% of the case size and discounts the proc fee but if the case is more complex, it may charge more.
Melanie Bien, director of Private Finance, says: “Charging a fee enables us to offer clients superior levels of service and face-to-face meetings at a time and location to suit them.
“By offsetting the proc fee, we ensure the client gets value for money as well as tailored advice suited to their circumstances.”
But Roberts says LIFT-Financial is used by high net worth clients and if he was dealing in the mass market, he would adjust his processes.
Asking millionaires for a few hundred pounds may seem straightforward but would this work for first-time buyers strapped for cash?
One reason given for charging for advice is the greater retention of customers from the advice stage to completion.
Internal research at Simply Finance found 68% of clients without a fee cancelled their cases, so it now charges an average of £695 to cover costs.
Similarly, Perception Finance believes it lost £30,000 in proc fees from cancelled cases in 2008 and now charges a £299 fee.
London-based brokerage Coreco charges £495 at application stage with the remainder payable on completion of the deal.
There is nothing like charging a fee to concentrate the mind of a client and gain commitment.
AMI estimates the average case takes between seven and a half and eight hours to complete, which is a long time to be working for free.
The possibility of not being paid after spending time and effort on a client has been enough for some to start putting a price on their service.
David Copland, managing director at Pink Home Loans, says there is a question whether to charge upfront or on completion.
“The problem with charging at completion is that having given the advice to a client, some will go direct anyway and there is nothing a broker can do,” he says.
“It is about making sure that clients understand that there is value in our work and if you don’t charge fee, then are you worth anything?”
Mike Fry, director of Cheshire-based Halton Insurance, says although his firm does not charge fees, he has sympathy with the upfront fees some charge.
“To be honest, sometimes you can do a lot of work trying to arrange a mortgage and it may not proceed so the brokers who charge a reasonable fee, I have no problem with. But personally, we do not charge any fees,” he says.
Although AMI’s Sinclair says some brokers are clearly making a no-fee model work and that consumer choice is important, he believes fee charging is also sensible.
“There will still be some brokers who have a no-fee model and with cross-selling of protection and life assurance, it can be viable,” he says. “But if some one wants to sell purely mortgages, then they may have to charge a fee.
“The challenge here is being clear to the customer that your knowledge and expertise and help is worth money.
“You want some commitment from the customer to help with the costs and it’s a good discussion to have with the customer so they realise what you are about to do for them.”
Sinclair says most people won’t work for less than £50 an hour so the average eight-hour case would cost about £400.
“I have always argued that if you tell people a service doesn’t cost anything, then they won’t value it. You run the risk of it being seen as a free service.
“If you charge a fee for your advice then you have probably got a better longer-term business. If you do this and create a business that builds loyalty with repeat custom, then you have a good model.”
He says brokers should be brave enough to be professionals and see the value in their work.
Fahim Antoniades, director at the Mortgage Centre IFA, believes that in the long term, brokers need to move closer to the solicitor fee-charging model.
“From a long-term perspective we are looking at creating a more professional industry in a similar way to solicitors and accountants,” he says.
“Nobody questions paying them for their time. If the regulator wants us to move in a more professional direction, then we shouldn’t be afraid of charging fees for our expertise. I hope it will be that way for everyone.
“Currently, you have brokers who are too scared to charge fees but who are not guaranteed a proc fee unless the transaction completes. This is not a sustainable model unless the broker is niche or has a unique selling point.”
The FSA has also called for greater professionalism in the mortgage market but does not suggest charging fees is the only route.
In its consultation paper on distribution and disclosure, the FSA says there is little evidence of commission bias and will not require firms to charge a fee to carry the independent badge.
“We have not seen significant evidence of commission bias in the mortgage market,” it states.
“Even if there were risks of commission bias, our enhanced sales standards will ensure that a firm only puts forward products on the basis of a consumer’s needs and circumstances.
“Our re-focused disclosure requirements will also require firms to highlight their remuneration – including whether they get commission. Therefore we do not believe that there is a strong case for retaining the requirement for a fee option in our new ’independent’ label.”
Charging fees is not a precondition of professionalism but it does show there is some monetary value to the expertise provided. But will charging fees actually limit access to advice?
Sinclair says it is simply a matter of supply and demand and if a broker cannot make a fee model work, it is being sent a clear message.
The challenges of direct-only deals, falling proc fees and a flat market have led to huge changes in brokers’ commercial models.
FSA figures show that in 2000, just 35% of deals were conducted via intermediaries but over the next decade this increased. In Q1 2008 about 60% of all deals were via brokers. As a result of the downturn, the last recorded figures show this percentage to be now about 50%. During this period, proc fees have gone up and down on sub-prime, prime and near-prime and brokers have sold interest-only, self-cert and fast-track deals.
That illustrates the changes the market has gone through and the durability of the broker model through constant and difficult changes.
Downturns are the time to make changes and prepare for growth and brokers are making the changes to ready themselves.
Whether to charge fees, and when, will be a key question for brokers this year.
We’re getting used to paying
Advice could be limited if brokers are charging fees from the outset. In other words, we can’t start to give you information unless you pay us a fee. The traditional method, whereby you only pay a fee if you’re getting a product, would impact far less as you’ll be paying other fees anyway.
Unlike other financial products, if you’re paying a fee for a mortgage you’re paying so many other fees it doesn’t have the potential to put people off in the same way.
We’re much less averse to fees than we used to be. In the good old days it was possible to get good, strong advice from fee-free brokers who would look at the whole of the market. With the advent of more direct deals that don’t pay proc fees and don’t allow brokers to sell them, this is harder.
We are very aware that there are some who want a really good comparison and for this brokers will have to charge a fee. Already, we’re starting to change our language – we still prefer the best brokers who don’t charge a fee as we’re MoneySavingExpert – but the model is changing and we recognise that.
The model is changing because it seems to me that mortgage lenders are trying to cut brokers out of the market by offering direct deals. I am very much against that because I think good mortgage brokers are valuable.
I don’t like the idea of cutting brokers out but it means they are going to have to change their commercial models. Some of them will, especially the smaller ones.
I don’t think it’s some collective conspiracy theory by lenders but I doubt that they are doing that much to protect brokers. Their margins are better on direct deals, they sell them through their own staff and do it their way.
To say they are deliberately trying to kill brokers is probably a step too far. But I don’t think an increasing number of direct deals is a good idea and I don’t like it.
I also have some issues with the Retail Distribution Review but I think the mortgage market is different.
I don’t think there is a culture shift in the RDR and I think it is going to be damaging for financial advice and we’ll see far fewer people going to financial advisers. I’m not sure it will have the same impact in the mortgage market just because people pay so many fees anyway that they are far more conditioned to being charged fees than in other financial advice markets.
It’s up to brokers to justify their fee and demonstrate the value they have added to their customer. If they can demonstrate it by finding them a better deal and helping them through, then I don’t think people will care.
But it will be difficult if brokers can’t demonstrate added value and the customer goes away and finds a better deal on a comparison site for a direct-only deal. In this scenario selling fees is going to be very tough.
Make sure you’re good value
The most fundamental thing when charging a fee is that it is reasonable and, in the eyes of the client, represents good value for money. After all, a £500 or even £1,000 fee can, paradoxically, be better value for money for the client than a smaller fee – or even no fee at all.
Indeed, in my experience, the best estate agents, solicitors and brokers often charge the highest fees despite operating in market sectors that are dominated by stack ’em high, sell ’em cheap merchants. They can do this because of the sheer quality of service they offer.
So, when to raise the subject of fees? As I see it, there is no point positioning your fee until you have got to know your customer and have explained all the help and services that you are able to provide. Really, this should be done before you start talking mortgages, protection and the like, although often it isn’t.
If all you do is try and get the client the ’best deal’ then how much of a fee can you really charge? You’re limiting your fee potential immediately.
Instead, you should be spending quality time getting to know the client. At the same time you should be setting out the aspects of your service that differentiate you from the competition. You should be setting out to establish a relationship with the client, not carry out a transaction. In many cases, the fee you can achieve is determined by the way the first 15 minutes with a client unfold.
You may not even talk about mortgages in the first instance but focus on relaying the whole range of services you offer. Being able to demonstrate an holistic planning expertise raises the level of fee you can charge by default.
As well as the way you position yourself in front of the client, what you are able to charge also depends on the quality of the customer experience.
It is all about ensuring that your clients see you as professional and good value for money, will recommend you and happily pay another fee to use you again.
As far as how much to charge and when, in some cases it’s a matter of building up the adviser’s confidence. Why not start off with, say, a £95 application fee, and then when you see how comfortable clients are with that, add in a £295 completion fee?
To be honest, that is still probably underselling your service and so many advisers will either charge more on completion or alternatively move all the fee up-front, which is an increasing trend among brokers today.
We make sure that our advisers have the best unique selling points in terms of, for example, lending, technology and point of sale.
This, combined with the sales process, customer service, and our advisers’ positioning, helps us maximise fee income, stand out from the crowd and, most importantly of all, generate very happy clients.
“We charge a professional broker fee. That amounts to £495 at the application stage and the remainder at completion depending on the value of the deal. We
have always charged fees and I think it is important that brokers start to act like the professionals we know we are. It is always something we can justify in terms of service provided and those who don’t charge are doing themselves a disservice.”
“We charge a modest fee of £299 on application. I am amazed that any broker cannot charge fees when you consider the
amountof business lost to cancellations. In 2008 we lost £30,000 in proc fees from cancelled cases so we brought in a fee structure tocounter that balance. Fees also show a commitment from the clients themselves to going forward with the deal. We couldprobablyjustify charging a higher fee but we want to get the balance right and create loyalty from clients.”
“We charge fees on all deals with the average around £695. We feel that borrowers are looking for advice and they are more
committed to the mortgage longterm. Two years ago our research showed that 68% of borrowers not charged a fee cancelled their mortgage with us so we never reduce the fee or charge zero. Solicitors and mechanics charge fees so we feel we should for professional advice.”
“We encourage the charging of fees. The challenge however has come from a rationed environment within which the
competition for every piece of business is extremely fierce, so some brokers opt to waive a fee, which is typically about £300. This is understandable if the broker is also arranging a variety of required protection policies such as life, accident sickness and unemployment, home contents etc, but if there are no policies being arranged then the broker has to ask himself whether he is underselling his own professionalism and acquired qualifications.”