BARE­FOOT IN­VESTOR

The Sunday Times - - BUSINESS - SCOTT PAPE The Bare­foot In­vestor holds an Aus­tralian Fi­nan­cial Ser­vices Li­cence (302081). This is gen­eral ad­vice only. It should not re­place in­di­vid­ual, in­de­pen­dent, per­sonal fi­nan­cial ad­vice

THIS week Mark Zucker­berg tes­ti­fied be­fore the US Congress.

It kind of looked like he’d en­tered an old peo­ple’s home, didn’t it? None of the old duf­fers seemed to have any idea how the in­ter­net worked.

Yet Zuck quickly clued them up, with his en­tire tes­ti­mony ba­si­cally amount­ing to, “If you’re not pay­ing for the prod­uct, you are the prod­uct”.

Back here in Aus­tralia a sim­i­lar sit­u­a­tion was play­ing out, but in a dif­fer­ent arena. The Bank­ing Royal Com­mis­sion is in full swing, and Jus­tice Ken­neth Hayne, the head of the com­mis­sion, was try­ing to get to the bot­tom of who mort­gage bro­kers ac­tu­ally work for:

“So who does a bro­ker act for, who does the cus­tomer think the bro­ker acts for, who does the lender think the bro­ker acts for?” he asked.

Well, turns out that 82 per cent of cus­tomers be­lieve their bro­ker is act­ing in their best in­ter­ests, ac­cord­ing to re­search from the bro­kers’ as­so­ci­a­tion, the Mort­gage and Fi­nance As­so­ci­a­tion of Aus­tralia.

But the banks, which pay bro­kers to feed them loans, were a lit­tle more cagey in their an­swers. The NAB re­sponded like a moody teenager be­ing ques­tioned by her par­ents:

“This is both a le­gal and a fac­tual ques­tion, which — as posed at the cur­rent level of gen­er­al­ity — is not ca­pa­ble of a sim­ple an­swer.” So there! The CBA didn’t even get a chance to get its mumbo jumbo on. They got punked when the com­mis­sion found a pre­vi­ously se­cret sub­mis­sion from for­mer chief ex­ec­u­tive Ian Narev, who ad­mit­ted that the cur­rent mort­gage bro­ker model — which gen­er­ates over half of all loans in the coun­try — is “con­flicted”, and as a re­sult cus­tomers are los­ing out. Damn straight, se­cret squir­rels!

So let’s de­tail why your mort­gage bro­ker is con­flicted.

First, they get paid by the lenders, some of whom pay higher com­mis­sions than oth­ers. Does that in­flu­ence who the bro­kers rec­om­mend? Maybe. The Royal Com­mis­sion found that the CBA’s wholly owned sub­sidiary, Aussie Home Loans, fun­nelled two out of ev­ery five mort­gages to the bank.

Sec­ond, the more you bor­row, the higher the up­front and trail­ing com­mis­sions paid to the bro­ker. That’s one rea­son why ASIC found that cus­tomers who use mort­gage bro­kers typ­i­cally bor­row more than those who ap­ply di­rect, and it’s also why they found that loans ar­ranged by bro­kers were 25 per cent more likely to go into ar­rears.

Zucker­berg, when faced with the over­whelm­ing con­flicts of his busi­ness, ad­mit­ted to Congress that Face­book was con­sid­er­ing im­ple­ment­ing a user-pays plat­form to pro­tect users.

It’s time mort­gage bro­kers in Aus­tralia did the same. Re­mem­ber, if you’re not pay­ing for the prod­uct, you

are the prod­uct. Tread Your Own Path!

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