Royal Commission - who's next?

Discussion in 'Property Market Economics' started by qak, 5th Feb, 2019.

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  1. qak

    qak Well-Known Member

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    Financial advisers have had commissions impacted.
    Mortgage broker commissions appear to be at risk.

    I'm wondering if real estate commissions are likely to come under fire as well? In most cases property management & sales commissions are based on % rates rather than 'work done'.

    Are there other industries that pay % based commissions (aside from direct retail product sales) that might be considered inappropriate?
     
  2. Harry30

    Harry30 Well-Known Member

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    Yep, heaps. Trailing commissions on mobile phone contracts. 30m accounts roughly. Not much work happening there.
     
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  3. Someguy

    Someguy Well-Known Member

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    I believe some of those door to door sign people up for charities do
     
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  4. Harry30

    Harry30 Well-Known Member

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    Many of the large IT and network vendors work on this basis. They charge a large upfront fee for installing the equipment and then an ongoing ‘software licence’ fee for using the equipment, often with little to no work or ongoing software upgrades. Often this ‘trailing commission’ model works better for the provider, as they can spread their expense over the period of the contract and match it with revenue received, much like the banks’ trailing commission to the broker.
     
  5. qak

    qak Well-Known Member

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    I think in this case there is something actually being provided here - the right to use the software. As much as I dislike these subscription models that are so pervasive now, I don't think it quite meets the 'no service' complaint.
     
  6. Harry30

    Harry30 Well-Known Member

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    It certainly feels like ‘no service’. Sometimes you may buy software and it is 100% upfront. Sometimes it is 90% upfront and remaining 10% over 3 years. Not much happens in that 3 years as far as I can tell.
     
  7. Waterboy

    Waterboy Well-Known Member

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    It's like paying rent eh? You pay it for the right to use the property. In this case, "intellectual property".
     
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  8. Waterboy

    Waterboy Well-Known Member

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    When I see them on the streets I pretend they don't exist. Even when they greet me, I just look through them as if they're thin air.
     
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  9. andrew_de_a

    andrew_de_a Well-Known Member

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    Aren’t you a top bloke then Waterboy
     
  10. Waterboy

    Waterboy Well-Known Member

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  11. Someguy

    Someguy Well-Known Member

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    It’s the right move. As soon as you talk or make eye contact with them they are all over you
     
  12. Someguy

    Someguy Well-Known Member

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  13. andrew_de_a

    andrew_de_a Well-Known Member

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    I get all of that but they are doing a job. Would of thought some human decency and manners wouldn’t go astray.

    I pass them all the time and have no issue in saying no thanks and continuing to walk.
     
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  14. C-mac

    C-mac Well-Known Member

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    I really value the vinnies and salvos stores. Donate goods you no longer need, they then sell these goods for a small cost that goes back into the local community of where that store is located. Also, I shop at them from time to time and even if its just a kitchen utensil or something lile that, that I need, I will shop at Vinnies for that stuff knowing the money goes to the community + is better for the environment as I am not unnecessarily adding to demand for a 'new' spatula, when i can buy an existing spatula with nothing wrong with it.
     
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  15. Simon Hampel

    Simon Hampel Founder Staff Member

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    It's not commissions themselves which is the problem - it is the perception about who is paying them where the issue lies.

    With financial advisers - they were getting paid by the product providers, not the people they were advising, so the question was "who is the adviser actually working for"? (in many cases I think it was clear that the advice being given was based on maximising returns for the adviser, not based on the best outcome for the client).

    Similarly with mortgage brokers - they get paid by the banks, not the borrower, so again, the question is "who is the broker actually working for?". At least that's the perception and the driver behind the changes - which I can understand. Personally, I have no problem with the current arrangements because it is a pretty simple and transparent process (unlike some financial products) - but I can also see how it can be open for abuse.

    However, with real estate sales commissions - they are only ever paid by the vendor. You need to be perfectly clear when buying a property, that the real estate agent you deal with is there for the benefit of the vendor and NOT the purchaser. Any "advise" they give you as a purchaser should be considered meaningless because they are NOT working in your interest and are not required to. There are laws prohibiting an agent from representing both the vendor and the purchaser in a transaction.

    That's where a buyers agent comes into it - they are paid to represent the purchaser and only the purchaser. This is also why a buyers agent cannot take commission from the vendor to complete the sale - it has to be fee for service. For a genuine buyers agent there should be no question about a conflict of interest.

    Similarly property management - the PM represents the interests of the property owner, nobody else. There is no question about conflict of interest there - they aren't paid by the tenants.

    It's not the method of payment (% based commission) which is the problem - it is who is actually paying where the issues lie.

    It wouldn't matter if mortgage brokers were paid a flat fee by the banks to facilitate a mortgage, it would still be a conflicted payment.

    Indeed, it can work in your favour for real estate sales or property management - since a percentage based fee can incentivise the agent / PM to maximise the sale price or rental rate, which benefits both parties.

    Whether someone pays a percentage or a flat fee is entirely up to the parties involved.

    The specific issue with mortgage brokers was the assertion that brokers were putting people into loans larger than they actually needed - solely for the purpose of maximising their commission.

    While I'm sure that some bad actors in the mortgage broking industry did indeed do this - I also believe that there are completely valid reasons for borrowing as much as you can afford to, while you can afford to do so - and then parking the excess funds in an offset account until required. It is a perfectly reasonable strategy, but if you believed the rhetoric coming out of the royal commission you would believe that all such practices are dodgy.

    This was only specifically an issue because it was not the borrower who was paying for it - and thus it had no direct impact on them if they were borrowing more than they needed.

    Once it becomes fee for service, then the whole issue largely goes away - if brokers want to charge a percentage fee, then they will need to explain to the borrower how much extra it will cost to borrow more, and many people will simply refuse to pay the extra and will only borrow what they actually need.
     
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  16. Simon Hampel

    Simon Hampel Founder Staff Member

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    To me, 90% upfront and 10% over 3 years sounds like a much better deal that 100% upfront.

    Also - do you expect the software company to ever supply fixes or patches or upgrades, or is this a once-off purchase?

    (Hint: software should never be a one-off purchase because it will invariably stop working at some point because of changes to the underlying operating system or hardware. Those fixes and upgrades don't write themselves!).
     
  17. wylie

    wylie Moderator Staff Member

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    I can tell you that with the regular stuff ups our bank has made (mostly with not being able to manage to get the prepaying of interest right) our broker has earned his trailing fee and probably well over the fee in fixing things up.

    I guess for each problem (and perhaps our problem is we have seven loans for the bank to stuff up), there will be another client who has a simple loan that requires little or no follow up.
     
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  18. Harry30

    Harry30 Well-Known Member

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    Simon, I agree with all your points. You want after sales service from the software company in a similar way that you want it from your broker. The point I was making was that the brokerage model (upfront + ‘trail’) is not unusual and quite justified from a number of angles. At the end of the day, Hayne’s claim that brokers do nothing following settlement was never properly tested and just wrong.
     
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  19. kcbworth

    kcbworth Well-Known Member

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    Travel agents (and online travel booking platforms) all follow a similar commissions model.

    The difference is they do not have a duty of care to make sure they only sell you the best option
     
  20. SatayKing

    SatayKing Well-Known Member

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    Afterpay, nimble, etc - I hope.