Banking Royal Commission: How brokers could get paid
Brokers can make any buying experience more convenient, effective and even fun. They remove the need to do the research into all available offers; are experts so can tailor the information to your situation; and often remove the "friction" where you move from one provider to another.
Brokers can make any buying experience more convenient and effective but due to skewed incentives this may not always be the case. Is there a way for brokers to earn their place in the sun?
Incentives drive corporate behaviour
Clearly brokers can add value, but a conflict of interests exists because it is not clear who the “customer” is for brokers.
If a member of the public is paying you, you are offering a service. If a service provider (like a bank) is paying you, you are a “distribution channel”. Incentives will generally drive the commercial behaviour of the organisation, no matter what culture is installed.
This poses a dilemma.
Most people have become so accustomed to easily finding what they are looking for (think Googling something), that the perceived value of true brokerage services have been reduced. “Money for nothing” according to Commissioner Kenneth Hayne. So members of the public are not willing to pay for brokerage services.
If you act as a distribution channel, clearly you are incentivised to sell as much of that product as you can. That incentivises you to give preferential treatment to products that earn you a commission, rather than what is in the best interest of the consumer (who is not willing to pay you). This manifests in a number of ways like ranking not on price; not displaying a full market; and not accurately estimating costs.
What can be done
A potential way for brokers to still earn their place in the sun is to create a transparent marketplace. This marketplace would have the following features:
- 100% of the available market is disclosed (So you do not need to do the research)
- Advice is tailored to your situation (So that you do not need to make sense of all the information)
- Exclusive offers are obtained and transparently marked (So that you get something you could not get somewhere else)
Perhaps then the consumer would be comfortable to pay for a service that clearly adds value to them or be comfortable that the marketplace gets paid commissions where they have been able to access offers that are not generally available.