WHEN ‘FREE’ ENDS UP COSTING YOU MORE

THIS column was supposed to be a rip-snorter.

See, when the findings of the Hayne royal commission were released was like Grand Final day for me. It was arguably the biggest finance story since the GFC.

So I wrote to the Barefoot Community and offered to answer any questions on the royal commission in today’s column.

I had a tin of instant coffee and toothpicks at the ready to answer the flood of questions. Here’s what came through: One guy wanted to know if marijuana stocks would be affected (ummm, no, Smoky), another asked what aftershave I use (?), and a few wanted to know if it was a good time to buy or sell homes.

So here’s my big takeout

Yet there was one group that flooded my inbox: mortgage brokers — who were angrier than Alby Mangels (Google him) at the Haynebomb’s recommendation to blow their trailing commissions to Timbuktu. It was easy to spot them — they often wrote IN FULL CAPS. Why were they so mad? Well, the biggest change from the recommendations will come when you shop for a home loan.

If it all comes to pass, banks will be banned from paying upfront and trailing commissions to brokers.

Instead, you’ll pay an upfront fee to the mortgage broker for the advice. Yet, how will that work out in the real world?

Luckily, I happen to know, because I did this last year with one of my staff, Natalie, who said she wanted to refinance her home loan.

We did three things: First, we shopped around to see what online lenders were offering.

Second, she rang her bank and used the scripts in my book to see if they would match the cheapest deal.

Third, I arranged for her to see an independent mortgage expert who charged an hourly fee for his unconflicted research, with no kickbacks. (This is the model that will be in place in a few years.) His fee for the research? $4000. Well, you could have knocked Natalie over with a feather.

The independent broker said it would take 20 hours of research at $200 per hour, but that he would also rebate the upfront and the trailing commissions.

In the end, Natalie went with a broker recommended by her accountant.

“What did they charge you,” I asked.

“Actually, I don’t remember . . . but I know I didn’t have to pay anything upfront!” she said.

And there’s the problem: The industry has trained customers to expect financial advice should be “free”.

However, the truth is “free” is the most expensive way to get advice because they’re loading up the cost of the product and generally expressing it as a percentage rather than a flat dollar cost, to obscure it further.

Still, most Aussies would rather have “free” advice, no matter how much it costs them in the long run.

Tread Your Own Path! — The Barefoot Investor holds an Australian Financial Services Licence (302081). This is general advice only. It should not replace individual, independent, personal financial advice.”

If you have a burning money question, go to barefootinvestor.com and #askbarefoot.