Advice Centre Consulting

Mortgage Brokers Transitioning to a Fee for Advice Pricing Model Part I

With lenders reducing commission rates, clients becoming more sophisticated and demanding, mixed messages from the legislator, and rapidly growing support in other professional services for fee based pricing it is timely to examine the appropriate pricing structure for mortgage and finance professionals in the future.

In my regular discussions with mortgage and finance brokers from around the country a common question arising is “how do I charge fees for my services?” Without trying to complicate this issue there are more decisions to make in designing and implementing an appropriate pricing structure than just introducing a fee for clients.

We will address a number of the issues in developing an appropriate pricing model in the next few editions of Growth Focused Monthly.

In this edition we will examine one of the four components of a pricing model – what we call the Remuneration Method.

In the context of this discussion, the remuneration methodology is limited to commissions or fees. Although there is robust debate around the definition of a fee, we would like to keep the definition simple. A fee is the price of advice and/or services to the client determined by the broker expressed as a dollar amount or a percentage of the loan value. A commission is compensation to the professional/business determined by the lender and derived as a percentage of the level of loan amount.
As discussed below, there are a number of variations in the way both fees and commissions are calculated in the broader financial services industry, but determining whether the price of advice and/or service is set by the lender or the professional/business is the first decision to be made in determining the appropriate pricing model.

Summary of Commission and Fee models

Commission Pricing Model: Where remuneration is derived directly from default commission attached to the lender/product chosen.

Components of the Commission Model: Initial – full or rebated commission.
In some instances brokers may ‘discount’ the upfront commission payable for such reasons as client loyalty or lifetime value of client.    Ongoing – Some lenders may vary the level of trail according to the quality and/or longevity of the loan.

Fee Pricing Model: There are three typical fee models used in the financial services industry. These are:
Percentage of Loan Model: Where remuneration is linked to a predetermined percentage of the loan value. The chosen percentage is applied to the loan amount for the initial service & again for annual ongoing service.

Predetermined  Rate: Where the professional/ business has a predetermined price for the initial & ongoing advice and services offered.  There may be a single offering or a variety of options available.

Variable Rate: Where the professional/ business ‘quotes’ a fee according to such factors as the value the business delivers to the client and the input into delivering that value. This will vary from client to client, as each situation is unique.

Why use commission as a remuneration method?

Benefits

  • Simple to administer – for professional/business & client
  • Current structure of products make it easy to be paid for placement of business
  • Clients perceive all advice and service is “free”.
  • Clients often appreciate not having to fund the cost of advice and service separately. ie: they  do not have to write a cheque!
  • Is a competitive method as most other professionals/businesses are compensated through commission
  • There is not the same requirement of the professional/business to articulate the value they are delivering

Limitations

  • A commission model remunerates a business according to the level of loan amount.  It is not relative to the value of the advice and service or the level of effort contributed to the advice and/or service.
  • Compensation for the professional/business is dependent on implementation.
  • Commission may result in a perception of bias in the recommendations/advice to the client.
  • Recommended lenders and products are likely to be influenced by the professional/business priorities rather than the needs of the client.
  • For lower loan amounts and advice requiring greater input from the professional/business the compensation level may not be relative to the value delivered or such effort.
  • May influence business to neglect components of advice where commission not applicable.
  • May be difficult to justify for larger loan amounts – inconsistencies of the amount charged for value delivered.
  • Clients can have a negative perception of commissions.
  • May be giving away expertise without being remunerated if client decides not to proceed to implementation or loan application is not approved.
  • Clients may be unsure of exactly how much the professional/business is being compensated as remuneration is percentage linked.
  • Professional/Business revenue is in the control of the lender.

A Fee Pricing model

Option 1 - Percentage of loan amount
This fee pricing model is where the professional/business compensation is linked to a predetermined percentage of the client’s loan amount. The chosen percentage is applied to the loan amount for the initial service & again for annual ongoing service.

Why use percentage of loan amount as a remuneration method?

Benefits

  • Simple to administer – for business & client.
  • Current structure of products makes it easy to collect most of the fee through crediting the commission due.
  • Client may only have to fund a small percentage of the fee if commission is applicable and credited
  • Removes bias from product selection as remuneration based on client loan amount not product/lender chosen.
  • Professional/business in control of their pricing structure
  • Professional/business may be compensated for recommendation/advice and effort if implantation is not completed

Limitations

  • May be difficult to justify for larger portfolios – inconsistencies of the amount charged for value delivered.
  • Clients may perceive a fee expressed as a percentage similar to a commission.
  • The fee calculated on smaller loan amounts may not be adequate remuneration for value delivered or business input in delivering that value.
  • Where the typical percentage based fee for both advice and implementation is in place the professional/business is not remunerated until implementation takes place.
  • May be perceived as uncompetitive where other service providers with a commission pricing structure and lenders direct services are promoting their services as “free”.

Option 2 – Predetermined rate

This fee pricing model is where the professional/business has a predetermined price expressed as a dollar amount for the advice and services offered. Often there are a variety of initial & ongoing service options.

Why use predetermined fees as a remuneration method?

Benefits

  • Professional/business is remunerated even if implementation does not take place.
  • Client may be required to find additional funds to satisfy the initial advice therefore steering  away clients who are ‘shopping around’.
  • Places a tangible value on the advice.
  • Fee structure clear to the client.
  • The professional/business is able to charge for the advice and/or service client needs and client  is not influenced to request lesser service to reduce cost.
  • In line with the way other professional services businesses are moving.
  • There can be no perception of lender/product bias.
  • Professional/business has clear understanding of the level of advice and service to be delivered.
  • Professional/business in control of their pricing structure

Limitations

  • Pre determined fee may not reflect the value of advice experienced by the client nor the input the business had into the development of advice.  This would be especially so for clients with more complex advice needs.
  • Cost may be prohibitive for clients with limited advice needs.
  • Professional/business will find it hard to justify if not fully conversant with the value he/she/it delivers.
  • Service delivery must be met so not beneficial if business cannot deliver to its service promise.
  • May be perceived as uncompetitive where other service providers with a commission pricing structure and lenders direct services are promoting their services as “free”.


Option 3 – Variable fee

This fee pricing option is where the professional/business proposes a fee according to the value the business delivers to the client and the input into delivering that value. This will vary from client to client, as each situation is unique. A fee is proposed to the client for:
-    All components of initial service.  This includes all advice components, initial consultations and may include the option of advice implementation.
-    All on-going advice and accompanying service components such as progress review appointments, progress reports, education forums, communication program and reactive advice related requests.
The cost of advice, both initial and ongoing, is determined by the advice needs of the client, the value experienced by the client and the business input into the delivery of advice. The fee will only be proposed to the client once their needs have been fully assessed.

Why use variable fees as a remuneration method?

Benefits

  • Professional/business is remunerated even if implementation does not take place.
  • Places a tangible value on the advice.
  • Fee structure clear to the client.
  • In line with the way other professional services businesses are moving.
  • There can be no perception of lender/product bias.
  • Professional/business has clear understanding of the level of advice and service to be delivered.
  • Professional/business in control of their pricing structure
  • The remuneration is linked to the effort required to deliver appropriate advice and value each client places on it.
  • Allows flexibility according to client needs.
  • Professional/business has better control over revenue.

Limitations

  • Professional/business is remunerated even if implementation does not take place.
  • Places a tangible value on the advice.
  • Fee structure clear to the client.
  • In line with the way other professional services businesses are moving.
  • There can be no perception of lender/product bias.
  • Professional/business has clear understanding of the level of advice and service to be delivered.
  • Professional/business in control of their pricing structure
  • The remuneration is linked to the effort required to deliver appropriate advice and value each client places on it.
  • Allows flexibility according to client needs.
  • Professional/business has better control over revenue.

In next months issue of Growth Focused Monthly we will examine the second component of a pricing model - the Remuneration Level. That's the "how much" component. (Part 2)

 

 

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