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The latest episode of Business Accelerator unpacked the commission-sharing and fee-for-service pay structures.
Here, industry experts Jason Back and Alex Whitlock explored the pros, cons, and business implications of each approach.
Commission sharing
Many brokers share a portion of their upfront or trail commissions with referral partners (e.g. real estate agents, accountants).
The industry average is around 20 per cent of upfront commissions, though some deals go as high as 50 per cent.
There are benefits to this structure, such as strong referral relationships, which can generate more business for brokers.
This model incentivises brokers to chase larger deals as that’s where the money is. However, it also means lower profitability due to giving away commissions.
There can be a risk of lower-quality leads as some referrals may be difficult deals, such as clients declined by multiple brokers.
There are also legal and compliance obligations as brokers must disclose commission-sharing arrangements to clients.
According to Back, he understands the commercial nature of them, but isn’t a fan of the commission model. This is a reality that often must be faced, he said.
“The three equations that we don’t get paid for are size, we don’t get paid for complexity, and we don’t get paid for time. So, the longer or shorter, the harder or easier, the more complex, etc, we don’t get paid,” said Back.
Fee for service
There has been a growing trend among some brokers to charge a fee for the services they provide.
This is a controversial and complex topic. However, there is a strong case for why this should be part of the industry.
Back said he is a supporter of this model as not all loans are created equal. Many require far more time, effort, and expertise than others.
Meanwhile, smaller loans can be unprofitable with commissions alone, wasting a broker’s valuable time.
Other loans, like SMSF, self-employed, or trusts, can be extremely complex and require much more work.
There are a variety of fee structures that a broker can put in place:
- Application fees (charging for pre-approvals to reduce time-wasters)
- Complexity fees
- Membership fees
Back said before engaging with a fee-for-service model, brokers must speak with their aggregator as each has a different legal standpoint.
“Some aggregators will cap out at certain dollar volume that you can charge. Others you may need to seek approval each time that you want to charge a fee for service. Others will have some very clear written legal terminologies that you’ll need to use when it charges fee for service,” he said.
Brokers who are skilled enough to warrant a fee could charge borrowers, provided they’re transparent and able to explain the proposition effectively.
Whitlock said borrowers could be open to the idea so long as the client understands why they’re being charged a fee.
“When you articulate your value proposition to a customer and they understand that, then I think a fee could be charged even on vanilla loans, but certainly for complex loans,” Whitlock explained.
The broking industry may slowly be shifting away from the “free service” model, but it’s important to note that a fee-based structure won’t be effective in every scenario.
High-volume brokers who need strong referral networks and markets where competition demands it are better suited for commissions.
However, markets with low loan sizes, such as regional areas, may benefit. Specialist or boutique brokers may also have the grounds to impose a fee model.
When a client requires a premium service and expert advice, a fee may be warranted.
Charging a fee would also lessen the burden of clawbacks.
As Back said, some borrowers want the “McDonald’s pricing” with the “Nobu experience.” Brokers should know their worth.
[Related: Business Accelerator: Commission split or fee for service?]
