Where to for mortgage advisers?

As trail commissions are removed by Westpac and AIA and rumours another bank will do the same, leaving just one bank paying trail, the dynamics of running a mortgage advice business are changing.

Mortgage businesses now have little of value to sell. “Nobody is going to buy a mortgage advice business customer lists – the value of trail books have limited to near zero value from a credibility perspective,” David Cunningham, Squirrel Mortgages chief executive says.

AdviceHQ founder and director David Green The New Zealand market is definitely changing and advice business models will have to change with it.

Major banks are changing their model by pushing mortgage advisers to just a distribution channel rather than having relationship banking.

He says it is mainly the established mortgage advice businesses will need to change their business model.

“The way the model was set up for the banking industry was essentially for advisers to fill the gaps the banks have left when they pulled back from relationship banking. That is part of why clients come to advisers but it seems the banks are trying to commoditise the advice process, which is completely different to the way the Financial Markets Authority (FMA) views it. It is not what the regulator wants and there is a bit of a challenge there for it.”

For Cunningham the business 20% is about the mortgage process and 80% is the advice side. He says the proposition of mortgage advice is stronger than ever and those that build a model around that will thrive, although it will be difficult.

“Banks only sell products, they don’t give life advice, which is what a lot of customers want – when to buy, how to bid, what insurance do they need, will they be able to buy an investment property in five or 10 years’ time. Banks just can’t do that. They have made noises about wanting to stem the flow of customers to advisers and perhaps they’ll stem that increase. We know they are trying to beef up their terms internally.”

Cunningham says the challenge for advice businesses is how do they keep good advisers, because they can set up their own business or work for the bigger firms who are trying a different culture from the banking oligopoly.

“It is interesting that in Australia all the banks pay trail and it is going the other way here. It’s a cheaper model and the oligopolistic behaviour of the banks in New Zealand is transparent in the sense if one zigs, the others zigs. To be fair, though, the commission model doesn’t change the adviser’s independent advice.”

Pivot needed

Green believes many mortgage advice businesses are thinking they will have to pivot and introduce KiwiSaver and/or insurance. That may not be sustainable, particularly in the short-term.

“If we are going to be losing money because trail is being ditched by banks and we still have to clothe and feed our families and pay bills, we need to do things differently.”

He says one option is for mortgage advisers to charge for some of the services they offer, although it will be difficult because they have always been free.

“Banks are the product providers and then they are also competitors offering services and that makes the proposition difficult. And they have a margin to pay for offices and staff, whereas advisers don’t have a margin. That’s where banks can run their cost model differently to what we can.”

Investigation warranted

Cunningham says last year’s “ludicrous” 1.5% cashback offers by the main banks are a scourge because they are a reward at the expense of the existing customer. Fixed rates are probably 10-20 basis points higher than they would otherwise be for existing customers. “It’s a tax on anyone that doesn’t change or can’t change banks to try and get a cashback.

It’s classic legalised anti-competitive behaviour.

He says if banks used fixed interest rates as the competitive tool everybody can get it.

Cunningham argues the FMA under its fair treatment principles under CoFI should be investigating this behaviour. He says when reading the regulations that behaviour could be interpreted quite easily as banks not treating their customers fairly.

It is exactly the same behaviour on floating rate and the 20% charged to customers who don’t pay off their credit card balance every month.

“The lens of fairness from the FMA needs a wake-up call. It talks about fair treatment, but it needs to be from a product design and pricing perspective.”

He says the FMA should be doing an investigation off its own bat as it set up the CoFI principles. It is the regulator’s obligation to consider whether the way bank products are designed and priced is fair trade for customers.