Bird In The Hand, or Two…?

BrokerNews had a good story last month on trailer fees.

Trailer fees are compensation paid to brokers on an annual basis. They are an alternative to the lump-sum finders fees that lenders normally pay brokers at closing.

The story cites some common benefits of trailer fees, namely:

• Brokers who use trailer fee lenders don’t have to fight lenders’ client retention programs to keep the client.
• Trailers discourage churning (moving a client to a new lender for no reason but to generate a new commission)

The problems with trailer fees (as cited by brokers) are:

• Potential conflict of interest (The claim is that trailers encourage brokers to not shop around for clients at renewal.)
• Concern about whether trailer fees follow agents when they switch firms
• Difficulty splitting trailer fees with sub-agents

One key point the story doesn’t talk about is renewal rates.

Cory McLean, a broker/owner at Verico Axis Mortgage, told BrokerNews that clients these days “don't feel a loyalty to a lender” as “they are becoming more educated.”

“That diminishes the value of a trailer fee,” McLean says.

That seems to make sense.  Clients tend to want two things more than any others: the best overall deal and a mortgage advisor they can trust. Most of today’s generation is putting less and less stock in the lender itself. As long as the lender appears reputable and has the best offer, people are usually happy.

Back to renewal stats.  One brokerage executive told us recently that less than 50% of mortgages make it to renewal. (Of course, for the clients that do make it to renewal, 90% stay with their current lender according to CMHC.)

So the combined odds are pretty good that a homeowner will either break their mortgage before renewal or switch lenders at renewal.  When that happens, a broker’s trailer fees often go out the window.

So the question is:  Does the broker take the bird in the hand (up-front finders fee) or two in the bush (smaller up front FF + trailers)?  Many still prefer a bird in the hand due to the multiple factors that can derail trailer fees. There is also a present value argument to be made for taking more compensation up front.

More important than any of this, is that we owe it to our clients to shop objectively for them on renewal.  Incentives from the existing lender shouldn’t guide our advice to consumers unless those incentives directly benefit the consumer.  That’s what people expect from us, and what we must deliver.