Fee for all

1 October 2010 8:00 am | By Lee Jones

A recent survey found that the majority of mortgage brokers are now charging fees to advise on home loans but why are these advisers so keen to move to a remuneration structure when there is still seems to be resistance in the life and pension market?

According to the Broker Census survey conducted by Mortgage Strategy magazine, 64 per cent of mortgage brokers now charge a fee for advice. In 2009, the survey found that 53 per cent of brokers were fee-based.

But while the FSA’s RDR research found some evidence in the pension and investment markets of commission bias, it found no such bias in the mortgage sector and mortgages will continue to offer commission from providers after the RDR.

So why would mortgage advisers choose to become fee-based? One of the big fears of the RDR for pension and investment business is whether clients can be persuaded to pay a fee.

Baronworth Financial Investments director Colin Jackson articulates many advisers’ concerns when he says: “The problem is that people are so used to not paying for financial advice, as soon as you tell them that it is going to cost £150 they are going to run a mile.”

One mortgage broker which shares that sentiment is London & Country. The biggest national mortgage broker, the firm has always put its “free advice” service at the front of all its promotion and it gains a lot of clients thanks to this.

Head of communications David Hollingworth says: “We do not charge a fee and obviously our clients are very pleased with that. Some of our clients have turned down a fee-charging broker and those will have made a saving if we advise on the same or better products and, in that regard, that is a big positive for them.

’I think most advisers will end up having to charge a fee for a mortgage. Commission oninsurance helps but you cannot assume you will always get the protection commission when doing a homeloan these days’

“It is often overlooked that as fees climb above 1 per cent that is not an insignificant amount for many borrowers.”
But not all advisers share the sentiment that fees will drive away their mortgage business.

Chadney Bulgin is set to go fee-based on its mortgage advice next week after a sixmonth trial across half their mortgage advisers.

Mortgage partner Jonathan Clark says he was amazed at how successful the test was. “We were surprised with how easy it was. Most of the clients did not bat an eyelid when they were asked for a fee. The state of the mortgage market has played into our hands somewhat because mortgages are not as straightforward as they used to be. A lot of people think they can go online and get advice but you cannot.”

Clark says the emergence of direct bias from providers has also helped the IFA move to a fee-based model.

He says: “We were not comfortable with our guys advising only from a list of lenders who paid them, that is not true whole of market. True whole of market is advising on direct deals and other deals we cannot get hold of as intermediaries.”

Private Finance director Melanie Bien says another advantage to charging a fee is it allows brokers to distinguish themselves in a market that is getting harder for intermediaries.

She says: “There are very good fee-free brokers out there but for what we do - complex advice that cannot be placed directly, time-consuming cases, big loans - you do need to charge a fee for that.”

Bien was previously with Savills, which charged a fee for its advice even during the height of the mortgage boom when commission was generous. She says even back then, the fee-based business model meant brokers could become selective in their clientele and allowed them to tailor their service to a market that really valued it.

“Most of our clients would not have the time or the inclination to shop around online or go into branches and are much happier to get high quality advice from someone who will sort the mortgage out for them.”

But while some mortgage advisers are choosing to charge fees as it fits their business model, many more are forced to switch models.

Highclere Financial partner Alan Lakey, who is one of the industry’s most vociferous advocates for the retention of commission for pensions and investments, says he has been forced to charge a fee for his mortgage advice for three years as the market has changed through a lack of competition and the addition of regulatory bureaucracy.

He says: “It used to be relatively simple to do a mortgage before the FSA took them on but now there is a lot of work to be done to complete one. At the same time, over the last three years, a number of lenders have stopped or reduced proc fees.”

Lakey says commission payments before the credit crunch could top 1 per cent of the mortgage but now advisers are lucky to get 0.3 per cent from the remain-ing lenders, so have to charge a fee to cover their time.

“I think most advisers will end up having to charge a fee for a mortgage. Commission on insurance helps but you cannot assume you will always get the protection commission when doing a home-loan these days,” he says.

Hollingworth admits that a commission-only model is tougher to operate in the market now but says the move to fees is a risk to clients. He says: “Borrowers really need easy and cheap access to advice. They do not want to have to be posed with the conundrum of whether they pay a fee or go to their bank and take what they are offered there. If borrowers do go back to direct sales channels and avoid getting any advice full stop, it would be the worst possible outcome for everyone.”

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