ASIC broker remuneration comments?

so it's out

Request Rejected

Anyone care to comment? It's a lot to read, remuneration is on page 9.

 

Write $20mil worth of loans every year to get about $120k in revenue for that year and $40k in trails year after year. Loan balances don't really go down by much in the first 10 years.

Doing that for 5 years means about $200k/year in trails. About 40 clients or 20 if going by Sydney median.

Not bad this broking business. The real question is how long before a broker starts to write $20mil of loans a year?

 

As far as conflict of interest goes, I've seen and experienced this first hand and I just walked away.

PS: Not by any of the great brokers that post on PC. A broker from Sydney that I previously had dealings with.

 

Writing $20M at the beginning is much harder than most people think, nationwide the average volume is still less than $1M per month, and that includes all brokers (newbie's and veterans). The national average loan size is also still well under $300k. It's still rare that I write a $1M+ loan.

Furthermore your figures are before costs, not what the broker takes home. Take out aggregation costs and a new broker will already loose 20% of that, then they've got all the other costs of running a business. The national average actual income or a broker still stands at less than $80k before tax.

The most recent stat I heard (on Monday) was over 50% of new brokers have quit the industry within the first 18 months, usually because they can't write enough loans to earn a living. I guess it's actually reducing? It's the sort of industry where you can do somewhere between well and amazing if you make it to 5+ years, but most don't last that long.

Certainly conflict of interest does exist, but I think the potential is much higher than the actual occurrences. From what I've read so far, the report focus' heavily on the potential for conflict of interest and is very light on the actual occurrence or the outcomes for the consumers.

Interestingly there's virtually no analysis of why brokers recommend certain lenders or certain amounts. As an example, the report states that 'White label' products tend to pay better and have a strong uptake with brokers. It fails to mention that these same products often offer consistently more competitive rates than other lenders products.

Of the proposals, I have no problem with proposals 2-6, although a some of this is simply compliance fluff that won't make any difference other than generate more templated paperwork (who needs tree anyway).

Proposal 1 (Improving the standard commission model) tends to be the sort of thing the banks use as an excuse to cut commissions overall. There can be better ways to implement this, but in reality larger lenders really don't like paying brokers. This will ultimately lead to fewer young brokers replacing those leaving the industry. Fewer brokers means less competition, which results in the big 4 having stronger control of the lending market - not a good outcome for consumers.

Overall I think this report is factual in its content, but it is heavy on possible conflict but doesn't go very far to address to positive outcomes for consumers.

 

To write 20mil would most likely take a fair bit in marketing costs/franchise fees or referral fees (paying for client referrals). It would also likely involve administration/business help, either an employee or outsourcing.
So $120k gross turns into maybe $80k?
$20mil trail is closer to $20kpa after aggregator costs.
It's hard to say how long it would take someone new to the industry to start writing this amount per annum. Unlikely in the first year, perhaps the second.

 

I was just going based on revenue numbers because costs are always different from broker to broker though I acknowledge there will always be fixed costs but working from home makes a huge difference to working from a shared office to working with one other broker in a fancy office.

The trails keep coming and adding up year after year, that's what I was trying to highlight there.

@Peter_Tersteeg is right and I can appreciate the "doing it rough and reap the rewards later" scenario that many young brokers entering the field face.

 

I feel like they really missed an opportunity to explore what really makes a good consumer outcome.To ASIC it appears it is all about the price paid (%) and if the loan falls into arrears or not. Nothing about service or advice in the entire document. That is hugely disappointing to me as what we do its a service business first and foremost.

 

@Marty McDonald well said. Today the MFAA is saying what a great result this is, but realistically there is so much that the report has chosen to completely ignore.

 

That's not right. $20 Million of settled loans = @ 100K taken by the broker, and @ 20 -25K trail taken by the broker - depending on their aggregator model. Take out insurances and business costs, and the average 15-20 million per annum broker generates @ 80-90K income pre tax.

 

Your trail figure is a bit high. Its more like 0.15% so $30K per $20M but that's neither here nor there, the big thing is you're missing the loan book run off.

Average run off would range from about 15% to 25% of the loan book per year from natural principal reductions and loan closures from selling property or refinancing elsewhere. So say you have a $50M book you will likely lose $10M off that book in one year. So you write $20M to add $10M to the book.

The more mature a loan book it is it the more this comes into play. So say the business has been operating for 10 years they might have a $100M book with $20M paid back in a year so if they are writing $20M guess what? Actually not growing and servicing hundreds of inquiries that don't create new business ie switching loans, running scenarios / servicing. This all adds to overhead / admin costs of running a brokerage.

What I've seen as a rule of thumb is if you settle X per year then you loan book will between 3 and 3.5 times that amount after say 5 years. So the maximum a $20M a year business would get to is a $60 -$70M loan book. At this point the wheels are spinning but your not moving forward. You would have revenue of say $210,000 but to grow further you will need to take on admin help so costs would go up to say minimum $80K pa. So therefore you'd be making $130K profit with a huge amount of risk taken on board. If you are with a franchise the income side would be much lower.

And ps most brokers don't ever get to this point!

 

This view is the same for all professional reviews ASIC do...eg financial advice etc. It is expected that the service level is to the highest standard to start with. The idea of moving to a LVR based fee (example) v's being based on loan amount. This seems to reflect that view. ie Pay a broker more for a good loan not a large loan.

 

Yeah but Nah. If they were fair dinkum about measuring consumer outcomes you'd think they would have asked a few consumers wouldn't you?

 

Thanks for the write up and insight into the finance broking business.

 

Words like "move to" and encourage are used....Lots of waffle. Like the soft dollar benefits. They use example of LENDERS paying for trips etc. Aggregators v's lenders didnt seem to get much of a mention. And seems unfair to hack at a broker tied to a aggregator but then totally ignore the CBA staffers who only offer a single product to anyone who walks in the door.....At least the broker will consider the best deal he can access unlike the bank who may have one product one deal and not mention what else the market offers

I thought the role of referrers could have been addressed better. I believe the industry and consumers know a broker gets paid a fee for the effort they do...Referrers dont always disclose however. Seems strange to smack travel junkets but then allow referrers off the hook so easily. Lawyers, accountants and financial planners should have MORE onus on them to disclose etc.
I refuse any and all referral fees for anything so I can never be held as having a interest when I express my views.

Just my opinion.

 

They did survey 3,000 according to para 1063....But consumers dont pay them would be the answer...Ever watched yes minister
The report was written before the Committee convened. They just affirmed what nobody had suspected all along.

 

Being paid based on LVR is something I can't understand.

Should a broker get paid less to help a 95% lend first home buyer get into the market in spite of regularly providing them a greater service than a vanilla 80% home upgrader?

Of course brokers should be paid based on loan size. Being paid on LVR is like being a car salesman being paid more to sell the Kia Rio than the Ferrari because there is less chance the buyer will crash it.

 

We should probably get paid more for the 95% loan. They're much harder and a lot more work to get approved than an 80% vanilla deal.

For a $500k purchase, I'll choose the $400k upgrader over the $475k FHB any day of the week. The 95% loan has:
* more paperwork
* triple the time educating the borrower
* less follow up
* significantly less chance of the loan being rejected (and starting from again with a different lender)
* $375 more commissions

 

Agree 100%.

 

Sorry for being naive, but can anyone please explain whats an aggregator and whats the trail commission ?

 

Aggregators are the middle man with processes and software that allow the little guy (small broker businesses) deal with the big banks.

Trail commissions are paid to brokers as long as the loan they write stays with that lender. This commission is to cover the on going service/queries the broker provides in relation to the written home loan. Eg. I write a loan with bank X. As long as that loan stays with bank X I will get paid approx 0.15% of the loan balance per annum.