Trail commissions are not 'money for nothing' – adviser

by Ksenia Stepanova15 Feb 2019

A host of lenders have come to the defence of the mortgage broking industry in Australia since the Royal Commission final report was published, with the recommendation to replace trail commissions with borrower-paid fees coming under heavy fire from the sector.

Trail commissions in Australia were described by Commissioner Hayne as ‘money for nothing’, though when it comes to trail in New Zealand, Auckland mortgage adviser Kris Pedersen says the situation is vastly different –  trail usually stops when ongoing advice stops, meaning advisers are strongly incentivised to maintain contact and act in the customer’s best interests

“The Commissioner has been saying that trail in Australia is effectively ‘money for nothing’,” Pedersen told NZ Adviser. “Apparently 80% of mortgages in Australia are on a variable rate basis, so actually, that does make sense. But in New Zealand, we can push hard to make sure that clients are getting the best pricing they can throughout the life term of a mortgage, and most mortgage brokers do a very good job at that. In Australia, they’re receiving trail even if they’re not necessarily giving much by way of management after the initial settlement.”

“If you look at customer outcomes, trail really does encourage mortgage advisers to continue to manage the mortgage on an ongoing basis,” Pedersen explained.

“If the client begins dealing directly with the bank, in most cases, the adviser would lose that trail. There’s an incentive in place there for the adviser to continue to manage the mortgage, and it’s not just ‘money for nothing.’ By contrast, having higher upfront commissions just tells advisers that they need to do a good job on the introduction side, and there isn’t the same incentive there to continue to ensure that mortgage is as well suited to the client as possible throughout its life term.”

Pedersen says that trail commissions also allow an adviser to maintain a support staff through potential ‘quiet periods’ or downturns, and they help with increasing regulatory pressures and the costs that arise as a result. He says getting rid of trail commissions would push many brokerages to become ‘one-man bands,’ a situation which would serve neither the adviser nor the consumer.

“There certainly is a bit of nervousness with regards to what’s going on,” Pedersen concluded. “The part that’s quite unusual is that this was an investigation into banking conduct, and the banks seem to have gotten away scot free while the mortgage brokers are taking all the heat. If they take mortgage advisers out, that would have a massive detrimental effect on the market and would massively boost main bank market share. This doesn’t make sense, as this was really meant to be an investigation into the big four.”

Neither the FMA nor RBNZ have yet commented on the Royal Commission final report, though a Reserve Bank spokesperson said they are ‘reviewing the report and considering the implications for New Zealand.’


  • by Noel Bowl 15/02/2019 1:09:05 p.m.

    Well said- you are making really good sense hopefully FMA and RB are listening and taking note.

    Hopefully Aotearoa- New Zealand will stand on it own two feet but the fear is the BIG boy Aussie own banks will have to tow the party line.

    Far too early to speculate- wait and see.

  • by Tony Hall 15/02/2019 3:42:57 p.m.

    Just for the record the Aussie proposal is NOT to replace trail with borrower paid fees. The proposal is to ban trail altogether (virtually a done deal) and replace up front commissions with borrower paid fees (this is the part that is subject to further review).

    Banks in Australia do not pay 'refix' fees or any other ongoing fees to brokers other than trail. Trail is effectively a management fee to fund the ongoing cost of servicing the client and it is essential for brokers to stop their clients going back to the bank for any service as the banks attempt to refinance or restructure the loan to cut the broker out. I have seen commission claw backs on loans refinanced internally by the banks as well as lost trail.

    Protecting trail can be quite onerous as most of the work required is nowhere near paid for by the trail of that particular customer. Trail is a little like insurance where the trail of many clients is pooled to help fund services to those requiring it. Most brokers in Oz conduct annual reviews and are available without charge whenever a client needs assistance.

    'What if' scenarios are frequent and can be very time consuming but usually not charged for even if they don't progress. Small top ups of say $20k on a Line of Credit might be worth < $100 in commission and yet full applications required and similar amount of work as a $500k application. This also happens in NZ and is why we need trail here. Current lenders offering trail pretty well fund the first couple of years trail by reducing the up fronts so debatable whether of serious benefit until year 3 or later.

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