Value of mortgage brokers business post royal commission

Had an interesting chat with a friend today. If the banks were to abolish trail commission and brokers to move to fee-for-service model:
- Will value of existing brokers book be reduced substantially or even be no value at all?
- Will banks use the opportunity to rationalise the commission paid to broker? (Similar to what they did after GFC)
- Will a mobile lender franchise be more valuable going forward, as they are technically part of the banks? Will they be subjected to any potential reduction/abolishment of commission paid by the banks?

Would be interested to get views from brokers in this forum

 

Banks will most certainly use this to reduce commissions and purge brokers.

I currently charge an upfront fee and have been for a while and am still do

 

Books are hard to buy and sell at 1.5 to 2 times income. It’s hard to see they could be valued less, maybe? Maybe existing books will be highly valued if trail ends as it won’t be possible to make anymore?

They will try, but they might have their hands full dealing with other issues the commission brings up.

Perhaps they will be more valuable. At least to the newbies/ex bankers/early termination package people who are the main potential purchasers. They get a similar commission as brokers at the moment but can’t write all the business, only what suits that lender. If broker Comms reduce why would the captured franchisees expect anything diferent?

 

Sweet FA. Sham contractor arrangement / commission only employee

 

So if trail commissions are removed after the RC, surely that means the upfront commission has to increase? Otherwise the Customer Lifetime Value is decreased and the value of existing books is decreased as a consequence.

Given this circumstance some of the more 'experienced' brokers must be considering selling their book now, rather than risk a post RC loss of value.

 

Fee for service will equal a 90% exit rate of brokers decimating the industry. Mmmm how does this benefit anyone but the banks. I smell a rat!

 

Yes, I noticed the Westpac CEO has gone on the front foot with this:

Should home loan brokers charge fees? Westpac CEO floats new pay model

Weren't Westpac the first bank to reduce broker commissions 10 years ago?

 

Yes they did and EVERYONE else followed suite.

 

The public: WE WANT MORE CHOICE
The regulators: OK HERE YOU GO LOTS OF NEW BANKING OPTIONS AND BROKERS
The banks: WE WANT MORE MONEY
The regulators: OK HERE YOU GO BROKERS FEE FOR SERVICE
The brokers: IT WILL COST YOU $900 FOR THAT LOAN PLEASE
The public: I WONT PAY THAT I CAN GET THE LOAN FROM THE BANK FOR $0
The brokers: HALP CLOSED DOWN
The banks: HAAHAHA NOW WE HAVE YOU AND YOU SHALL NEVER ESCAPE US AGAIN WITH OUR POOR PRODUCTS AND ADVICE
The public: WE WANT MORE CHOICE

 

The fee of $900 would equal a net loss all costs considered. Would need to be closer to 4k / loan to make it even viable and worth the time and effort. Also zero "after sales" service would need to be applied OR a fee charged.

 

Who is going to buy a loan book right now though, unless they've got their heads in sand nobody would want to invest in something today which could be worth very little tomorrow.

Logically you would think that upfront increases if trail is removed but clearly that isn't what is being suggested by some of the major lenders.

Hopefully this is one of those scenarios where logic will prevail ahead of the political outrage and broker bashing. We've all seen the market cool in recent times post the APRA changes and that has no doubt be a sustained / controlled cooling off. Rendering an entire 3rd party channel unprofitable and irrelevant to the customer would be a great way to boost bank profits, might be time to buy!

 

If you do away with mortgage broker trail commissions, we would no longer have an incentive to provide ongoing service to clients. These days only about 30% of my time is related to writing new loans for clients. I spend a significant amount of time renegotiating rates, processing and getting approved small top ups (which are not even remotely profitable). The banks don't pay any extra for this.

Without the trail commission, I'd be better off to recommend a new lender and a completely new loan, rather than spend the same amount of time on a $20k increase that pays me $100 (and costs me about $1200 to process).

Canada and the UK don't have trail commissions but they do pay significantly higher upfront commissions. These countries also have significantly higher levels of churn (moving from one lender to another) than Australia experiences, regardless of what is in the client's best interests.

The current commission model isn't 100% perfect, it can be abused. I've yet to see a model that serves consumers better however. Every proposed change by the banks will have significant negative consequences to consumers and will also increase the banks profits.

 

Financial planners and brokers starting out, the same people who have bought them historically.

Planners buy them for the cross sell, new brokers buy them for the income and marketing opportunity.

Books can be sold two ways, with client data at about 2-3 times income or just as an income stream, at about 1-2 times income.

I can’t see prices changing much if trail goes. The customer data is still worth something to planners and new brokers and it won’t be retrospective, the income stream is still there.

 

I know of a few mobile lenders (big 4) who are doing really well. Not sure if they are doing better than an average broker though. Receive a lot of leads/businesses from the branches who can’t go out and see the clients

 

Maybe I'm just misguided, but if a trail book was worth for arguments sake $100k pa in trail income today, valued at 2x income ($200k) and tomorrow that trail income becomes $0 pa then I'm no longer going to pay $200k for that book even with customer data....

 

books may become even more valuable.

 

It’s highly unlikely to be retrospective. Happy to be proven wrong, but it’s pretty rare for governments in western democracies to legislate changes that effect businesses retrospectively.