Wayne Leggett explains why it is mortgage brokers, not planners, who have the upper hand in terms of influencing the amount of money they manage.
I have to confess that I read Mike Taylor’s story, ‘Don’t compare us to planners say mortgage brokers’ twice.
The Finance Brokers Association of Australia’s (FBAA’s) contention that, “….mortgage brokers are not in a position to influence the amount of money they manage” (as opposed to planners) is nothing if not completely the wrong way round!
Before delving too deeply into backing up this viewpoint, it should be pointed out that this is not a “them and us” argument, from my perspective. My company, Paramount Financial Solutions, includes a mortgage broking division and has done so for many years.
But, if you compare the relative regulatory regimes under which these two professions operate, it is pretty clear that, of the two, the one more likely to a) be in the position to influence the amount of money they manage and b) be remunerated, accordingly is mortgage brokers.
While the financial planning profession has been encouraged through legislation to move to remuneration practices that, effectively, break the nexus between fees and the amount of money managed, notwithstanding that the transition is still taking place, the mortgage and finance broking industry still operates almost exclusively on a model of upfront and trail commissions based on the amount of money borrowed and remaining outstanding.
According to the article, the letter states, “mortgage brokers cannot ‘create’ demand by encouraging a consumer to take out a mortgage against their own volition and they cannot upsell the consumer”. While many would refute the accuracy of this assertion, the inference is clearly that financial planners have more capacity and incentive to do so. The relative capacity of the two groups to influence client behaviour is pure conjecture, while, as already demonstrated, planners are less likely to have a vested interest in the quantum of a transaction than would a finance broker, in this day-and-age.
Once the premise that there should not be a direct link between the size of the account and the fees applicable to it became the standard in financial planning, it stood to reason that this same principle should, ultimately, apply to mortgage broking. There is no more valid argument for a link between the fee paid to a finance broker and the size of a loan than there is for financial planning fees to be linked to the size of the portfolio. Thus, if it is to be argued that remuneration practices linked to the size of the transaction are not in the best interests of financial planning clients, it is hard not to make the same argument for borrowers.
Therefore, it is ironic in the extreme that the body entrusted with representing the interests of an occupation whose members receive upfront and ongoing remuneration directly proportional to the size of the transactions over which they preside should attempt to take the “high moral ground” over a profession that, albeit of late, has made concerted moves towards remuneration practices which attempt to eliminate any recommendation bias.
If we are to accept that consumers should expect that, when it comes to financial advice, whatever form that advice may take, said advice should place their best interests before those of the adviser, then surely this “client first” principle should apply to ALL entrusted with assisting the public in administering and managing their clients’ affairs.
If it is deemed inappropriate that a financial adviser should receive ongoing trail brokerage as a percentage of the assets under his or her “advice”, then the same should surely apply to a finance broker in relation to trail payments on their “back-book”, particularly when, almost invariably, there is not even a token attempt in the case of the latter at any form of ongoing client service.
Again, as stated earlier, this column is not an attempt to justify the position of one profession’s remuneration practices in comparison to another.
However, if we are to accept that clients should reasonably expect that recommendations made to them put their interests ahead of those of the adviser and their employers, and that any remuneration methods that bring this order of priority into question are to be frowned upon, then that guiding principle should, in the interests of fairness, apply to any circumstance where to act otherwise would compromise this principle.
Contrary to the FBAA’s contention that they should not be subject to the same rules as financial planners, not only should they be subject to the same regulatory scrutiny as the financial planning community, the same should apply to ALL financial professionals where the possibility of conflicted remuneration exists, including general insurance and stock-broking.
Such measures may be a “bridge-too-far” at present, but reason would suggest that such change would be headed their way.
After all, a level playing field should not be too much to ask for among financial professionals.
Wayne Leggett CFP JP is principal of Paramount Financial Solutions.