Royal Commission - who's next?

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.

 

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!).

 

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.