What a fee-only model could look like

In the latest issue of CMP, James Laird, president of CanWise Financial, wrote about a commission structure that has worked for financial advisors for years – and considered how it could work for mortgage brokers.

“Investment advisors, who place their clients in financial products such as mutual funds, ETFs and hedge funds, are moving to a fee-based model whereby the customer knows exactly how much the advisor is earning, instead of the commission being buried,” Laird wrote. “The question is: will our industry make a similar shift in the coming years? If so, is there an opportunity for a brokerage to get ahead of the curve and shift to a fee-based model in the near term?”

Laird considers how the model would operate within the industry.

Brokers would first have to consider how much to charge for services – a fee that would be required fairly early in the mortgage negotiations process since a broker’s work starts right away.

“Determining the size of the upfront fee that a customer would be willing to absorb would be challenging – I would imagine that any fee that is higher than the cost of a real estate lawyer (between $600 and $1,000) would be a very tough sell, even though this is significantly below the average fee that most brokers currently earn,” Laird wrote.

According to Laird, the only way a customer would choose to work with a broker who charges an upfront fee is if that professional could offer a superior rate and service.

Delivering on that rate, however, could prove difficult. Theoretically, he writes, this could be achieved by buying down 100 per cent of the rate.

“However, in practice, this would be difficult as many lenders have a rate floor that you are not allowed to go below, and this rate usually still includes a finder’s fee of around 40 basis points,” Laird wrote. “Further, most lenders will not allow you to use your volume bonus to buy down the rate – their systems simply are not set up to accommodate this.”

Another option is if brokers offer a cash-back incentive. However, Laird believes that model would be difficult to market due to its complexity.

And, after all, client dissatisfaction is one of the main reasons many in the financial advising industry has shifted to the fee-only model; that same dissatisfaction is not being voiced in the mortgage industry.

“At a high level, an upfront fee-based mortgage brokerage model does have some merit; however, consumers have not called for it, and it is unclear whether or not it would solve any identifiable problems,” Laird wrote. “If a broker attempted this model today, they would likely face an uphill battle from consumers and lenders alike.”

MBN