Westpac decision “a bit of a tragedy” - adviser

To some advisers this is the thin edge of the wedge, particularly after an S&P Global report showing a move by the big Australian banks, which own New Zealand’s main banks, to steer borrowers away from mortgage advisers and towards their more profitable proprietary channels.

It has been reported that Westpac will lift its up-front commissions to an unspecified level from the current 0.6% and stop paying 0.2% trail commissions, but no final decisions have been made.

Mortgagesonline founder and adviser Hamish Patel wonders where Westpac’s relationship with Dosh will end up if the bank pulls its trail commissions.

The fintech offers Westpac home loans without any financial advice and a loyalty cashback reward to clients of up to 0.20% over the term of a mortgage.

“If the Dosh and Westpac relationship carries on as it is, then it’s an almost insane incentive for mortgage applicants not to get financial advice,” he says.

Key Mortgages director and adviser Jeremy Andrews has a similar opinion. “It's almost like bribing clients to go with a solution where they don't get advice.”

Clients have the option of getting advice or not but if they get a mortgage through a fintech without tailored future goals advice it can come unstuck.

Andrews says the whole point in lenders paying trail is to enable advisers to encourage ongoing advice to clients rather than just originating the loan, sending it to a lender and then no further help is provided.

“To a degree that is the ANZ and ASB model as they don’t pay trail.”

Though both ANZ and ASB provide advisers a $150 refix fee, it’s unclear whether Westpac will do so. “We are often making a loss in terms of providing ongoing advice to clients – the  administrative cost around providing that advice is typically more than $150, but advisers will still provide the ongoing support without charging clients a fee.”

“It seems very much a try on by banks – we’ll pay mortgage advisers for originating the business and they place it with us and then we will take over from here.”

He says the part that is missing in this decision by Westpac, is that there is a bunch of clients that we carry and give advice to.

For other banks who have stopped paying trail in the past, it has not worked. BNZ stopped in the early 2000s and it backfired. The bank lost market share and ended up re-entering the market to win back business.

S&P Global’s report says that by driving more customers to in-house channels like branches, call centres, and increasingly digital channels banks can boost their net interest margins and profitability.

For Patel’s small mortgage advice business that's focused on ongoing service, Westpac’s decision is a bit of a tragedy. “If other banks follow suit, the sector will become transactional only.”

Andrews business has clients that have been receiving advice from the company for 10 years. “To run that type of business model advisers need to have trail income or they can’t afford to pay staff and assist clients.

He says the idea behind trail income is banks don’t have to pay a person to provide that advice in a branch. We take over and get paid trail to compensate for that advice.

“There are thousands of advisers who sent banks business and are relying on trail to pay their bills and staff.”

Patel worries about older clients who can’t refinance if Westpac pulls trail income. “How are we going to carry them?  There will be a lot of vulnerable clients that aren’t in a financial situation to be able to switch banks and won’t have access to ongoing advice. We can only do so much pro-bono work, which is what it will come down to.”

He says there is disappointment at Westpac’s decision to consider cutting trail income, especially from advisers who are trying to build businesses as opposed to people who have just come into the business and are transactional.

“A substantial number of us pay our advisers salaries and we're trying to build businesses that support our client long term in line with the regulations we work under, which includes ongoing advice.

“It means that we suddenly have to redesign our business models and we have to think hard about how we carry those clients in the long run.”

He says for the newer advisers who aren’t paying salaries and have few fixed expenses it will be easier to get more money upfront and no trail. 

For more mature businesses it will looking at other ways of complementing ongoing income – insurance and KiwiSaver. “These are two income streams many advisers leave on the table for the banks. We have to seriously think about these income avenues.”

Another conversation that has been raised about Westpac’s decision is the tax treatment of any payout to businesses holding substantial trail.

Will it be treated as a capital gain or income. Patel says if Westpac does a buyout it will not be subject to income tax as he understands it, but if it is treated as forward income for the next two years, it will be taxed.