Bird In The Hand, or Two…?

Trailer-Fees 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.

  1. …clients these days “don’t feel a loyalty to a lender”…
    or is it the brokers telling the clients not to feel loyal? lol, that’s a whole other discussion.
    The trailer fee model works in the financial planning industry, and the insurance brokerage industry, so why wouldn’t it work for mortgage brokers? I also agree with the quote in the article about “churning deals”. IN GENERAL, do all clients really want to re-qualify every 4 to 5 years? I said in general,so don’t jump all over me.
    A good article, and I support the trailer fee model.

  2. Don’t forget the time value of money. We’re receiving substantially less up front in exchange for trailers…which essentially pay us the same over time.
    That’s my biggest concern with the trailers – it’s kind of a forced savings plan with no guarantee. Better to take the money up front and invest a portion of it.
    Mind you – I haven’t done the math on this…

  3. I am not so sure if the trailer fee model really works all that well in the financial/insurance industries. Yes, it has stuck, but that doesn’t mean it’s the best thing for consumers.

  4. Street Capital pays on renewals? Are you sure about that? I don’t think so.
    For the record, I don’t think people give a rat’s a** about the lender. A good rate can make them love any lender.

  5. I really enjoy reading the comments section of these articles. It’s always good to hear what our partners are thinking.
    I would like to address a couple of questions raised in the article:
    First, the question of interest rates at renewal. You are spot on. And a successful trailer program requires a commitment to customer service, competitive “no haggle” renewal pricing, as well as co-branding with originators to the borrower. These are all currently available to mortgage originators in Canada.
    The second is the comment about renewal rates, specifically the comment that 50% of mortgages don’t make it to renewal. That is not even close to our experience at MERIX. And I’d suggest other lenders would agree. However, I think we need to look into this “stat” further. For example, customers increasing mortgages and porting their mortgage to another property does not necessarily mean the mortgage ends at that lender and with them the trailers. In fact, in our program, these scenarios positively impact them, by paying more on the increased amount. It all depends on how the lender structures their trailer fee program.
    The reality is that our industry still sees trailer fees as something new and different. Some are holding on to the “eat what you kill” mentality, and yet others, especially the younger generation, appear willing to consider trailer fees as a way of diversifying a portion of their revenue streams and using the co-branding tools as a way to help them stay in touch with their customers.
    The debate continues in terms of which method of compensation is better for the originator. However, hands down all lenders would agree it is far less expensive for them to be paying commissions all up front. They’ve all done the modeling around trailer fees and yet why aren’t more than 2 lenders offering it? If it meant paying originators less over the life of the mortgage don’t you think more lenders would’ve jumped on board?
    So, maybe trailers are more advantageous to originators than most realize…
    You have options in this industry — use both and diversify your revenue stream.

  6. Hi Andrew,
    It’s great to hear the other side of the coin. Appreciate the post.
    The big question is the ratio of customers who stay with their lender beyond their initial term.
    Unfortunately there are no published stats (that we could find). The <50% to renewal estimate was from an executive who ran a good-sized lender. It likely applies more to 5-year fixed terms. The odds of someone reaching maturity in a 1-year fixed, for example, are much greater. For that term, the trailer fee model might have a higher expected value. (On the other hand, short terms are the minority of the market.)
    We tried hard to find a published stat on the ratio of people who make it through a full 5-year term and renew with the same lender, or refi early with the same lender. I don't suppose Merix would have this number?
    What we do know is that:
    * The effective weighted average term is definitely a fair bit less than 5 years on a 5-year fixed.
    * The commonly used figure is that the average Canadian gets a new mortgage every 3.5 years, give or take.
    * CAAMP says 18% refinanced to take out equity in 2009 (1/5 of mortgage holders in just one year)
    * CAAMP states that 12% of customers leave their lender once they get to renewal.
    * CAAMP says ~40% of people early renew (More and more, these people will consider other lenders as it gets easier to compare rates and terms online)
    So all this boils down to one big question: How many Canadians ride out a full term and stay with their lender? We know it's much less than 100%. Once we have that number, it's easy to model expected value of trailers versus lump-sum compensation.
    There's another interesting point as well. You mentioned that trailers cost lenders far less in compensation. Wouldn't that imply that the average broker therefore makes less in this model?
    If so, will brokers gravitate to a lower expected gain? It seems that older brokers (within range of retirement) might like trailers if they plan to get out of the business. But do the younger impatient generation really like the prospect of waiting years to get what other lenders offer up front?
    In any event, we'll keep looking for hard numbers. If you or Merix have any statistics to share that would be great as well.
    Of course, this still doesn't speak to what is best for the client, which is the only thing that matters in the end.
    Cheers,
    Rob

  7. Hi Rob, I actually said it is less expensive for lenders to be paying originators all upfront.
    Trailer fees are more expensive, which is why only 2 have adopted it.
    The retention rate is something that can be bantered about, but in both scenarios you brought up (18% early renewing, and 40%refinancing) the customer is more likely to stay with their current lender due to the penalties that would be levied if they left that lender.
    So perhaps the mortgage is technically broken, but there could very well be lender retention in which case the trailers continue. As I said, it all depends on how the lender sets up their trailer program.
    To your point, retention rates aren’t 100% but they certainly aren’t 50%. Do you really think Lenders would allow that? Just look at the money and emphasis placed into lender retention teams in the past 2 years.
    Which is why it is our beleif originators should consider hedging their bets. How much they want to place into trailers is up to them.
    Of course, this decision is secondary to the needs of the customer. That should be a given.
    Thanks again for the opportunity to comment.

  8. Hi Andrew,
    You’ll have to pardon my reading disability. ;)
    In that case, there is apparently still some debate about the cost of the trailer fee model to lenders. Some have said it costs less, all things considered. And, in my opinion, your point is equally valid until we get hard numbers.
    Regarding retention on refinances, it seems logical that most would stay with their current lender. (But not all. It’s the number who don’t stay that are the crux of the issue it seems.)
    Of course, penalties may or may not be a factor depending on whether it’s IRD or not. Tens of thousands of people refi’d in 2009 despite big IRDs, simply because they ended up saving more elsewhere.
    I’ve made some calls to get some stats. Let’s see what we come up with. Again, if Merix has numbers to clarify the matter, they’d probably be very telling.
    Cheers for now,
    Rob

  9. to add one more comment on renewal clients… Both my sister and I work in the broker industry but when our 3rd sisters mortgage was up for renewal this year she said, “should I just renew with my same lender? thats easiest”. So even tho she had TWO family members in the broker industry, she was willing to renew for 1.5% higher than the rate I eventually obtained for her because it was easiest and her original broker hadnt contacted her at renewal. There may be some mad rate shoppers, but I think she is fairly typical of many clients.

  10. Hi Barb,
    You’re so right that convenience takes precedence for so many people.
    Maybe it’s partly because they don’t realize what the rate differential (between their lender and the competition) costs over five years.
    It’ll be interesting to see how retention statistics change in the next five years. There are at least two competing forces at work:
    1) More aggressive lender retention strategies
    2) Mortgage consumers that are getting more and more rate savvy every day.
    On another note, CMHC and CAAMP don’t have readily available stats for the average effective duration on a 5-year fixed term. So we’re still digging for published numbers to model this all out.
    Have a great weekend…
    Rob

  11. I have been a consistent high producing mortgage broker for 15 years and just this year I made the decision to put a portion of my business (around 50% this year and will likely increase it steadily over the next three years) to a trailer fee model. Why?
    1) The facts are much like Andrew said, trailing compensation now is significantly better then when it was first introduced. If you have a qualified relationship with either Macquarie or Merix, your total compensation in a five year period is much more then an up front compensation, and certainly compensates for the time value of money.
    2) I am switching my mindset, to looking at my client relationships as “mortgages under management” as opposed to a “transaction business”. Before everyone jumps in and says “I manage my clients mortgage by actively working my database” sadly the facts do not portray that the broker community is effective at managing their clients or in moving them away from the lender they sold the relationship to. Trailer fee models support the management of our clients mortgage mindset. I want my clients to view our relationship like they would a financial planner. If at an early renewal the current lender can not be competitive with a port or increase and blend then I would move it regardless of trailer fee. By the end of the second year of the term I will have been paid the equivalent amount I would have been paid if I took the commission up front, less the time value of money loss, but at current and projected inflation that is a minor concern. The bottom line, and we all know this, most incumbent lenders can be very competitive at early renewal, and at maturity for that matter that switching is becoming an exercise in futility for both the broker and the client
    3) Along the same lines as point two, lenders retention teams are just getting too powerful and quite frankly I am tired of fighting my lender partner, I would rather share the client for the long term I believe that mindset will be beneficial for both me and my client in the coming years. The landscape is changing, either be a good partner for your lenders or find yourself with nobody to play with.
    4) The financial sense of creating a recurring revenue stream and an asset that truly has value (my database) is just now too compelling looking into the future of our business.
    5) I can see the end of my business (sigh, I am getting old…LOL) and as such see the virtue of creating a healthy annual compensation in 5 years or so that will allow me to gasp…stop originating and just manage, or sell the book I have. On the flip side if I was newer in this business today and could look out 15 years or so I would ABSOLUTELY be building a recurring revenue stream. Look at the math my friends in this industry, it is staggering. I only wish I could have started this 15 years ago, what I could be sitting on now??? Sigh…That option was not available to me.

  12. You chose to give 50% of your business to two lenders mostly because the compensation was better? You are brave to admit that in public. :)

  13. People shop around so much today. I think that fewer people are going to be staying with their bank at renewal time. I know this hasn’t been the case lately but I think outside competition will supercede retention.

  14. “It’s not all about the money” Thanks for the comment or shot, not sure which, in this forum the topic was about trailer fees not competitiveness.
    If you were well advised on how the industry works you would know that when you achieve status at lenders your compensation often increases vis a vis other brokers, but most importantly so too does you rate discounts available to customers. As well being a proven top producer for years does not come with self interest trust me.
    Therefore I don’t think it is “brave” at all, but I do think if someone is going to take a shot if they stand behind a pseudonym instead of their real name then that is certainly cowardly

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