Shaun Almond is managing director of HL Partnership
Logic tells us that if two loaves of bread of the same quality are priced so that loaf A is cheaper than loaf B, then clearly loaf A is the one we should buy. Indisputable fact. We can make the same case in an infinite number of examples.
The key considerations are that there is no material difference in the makeup of the object or the impact the purchase will have on the buyer.
When assessing which mortgage is the most suitable for customers, having chosen candidates from the broadest selection of suitable alternatives, advisers then run into a knotty issue. Namely, the definition of which is in fact cheapest.
If we accept that the best mortgage among those options is the one which has the lowest rate at outset, then are we really providing our customers with the best option, or just ticking a box and in fact not doing the job we are being asked to undertake?
Understandably, the regulator wants the best outcomes for customers, and sees cost as the key determinant in assessing the right mortgage or lending arrangement. However, the obsession with ‘the cheapest’ has led to a skewing of the meaning.
For advisers who use sourcing systems every day, the default setting provides a list of lender products in order of headline rate cost – namely, the cheapest available monthly payment at the start of the mortgage.
Job done? Hardly. What we should be ensuring is that the definition of ‘cheapest’ also pays attention to value.
Mortgages which have a notional term of 25 years might have fixed or discounted rates over a set period within that notional term. A diligent mortgage adviser would ensure that their client remortgages before the standard variable rate (SVR) becomes applicable. But just because a mortgage sits at the top of a research list on a sourcing system does not mean it represents the best value for a customer who may not expect this to be the only mortgage in their lifetime, and who is going to pay it off after 25 years. Property ownership is not that simple.
Let’s also not forget that comparing like for like can throw up anomalies that nullify the argument that the cheapest headline rate is the best for the customer.
What are the charges being levied associated with the mortgage with the cheapest headline rate? How about the penalties for early redemption –particularly at this time when lenders are struggling to cope with the post-lockdown and stamp duty holiday housing market boom?
Will the cheapest mortgage still be available when required, and can it be processed in time to complete?
Any future definition of cheapest must reflect the actual value of our recommendation and mitigate any risk that we become glorified price comparison websites.
The Mortgage Market Review (MMR) demonstrated that the real value to customers lies in the advice that complements the product recommendation.
The regulator’s investigation into the general insurance (GI) market and the disparity of pricing to new and existing customers provided evidence that headline rates do not necessarily offer a true reflection of the value of advice.
If an adviser firm has the resources to employ a dedicated compliance officer or can afford an external compliance service that does more than simply check a limited cross-section of files for its fee, then don’t let my arguments stand in your way.
However, with the current pool of professional indemnity providers shrinking, the decision on appointed representative (AR) or directly authorised (DA) is becoming increasingly more important.
Even with impeccable records, more DA brokerages are seeing their premiums increase to a level which is becoming potentially unsustainable.
Being directly authorised also means a growing need to invest in technology that not only helps administer new business, but is easy for professional indemnity (PI) insurers to audit in the event of a claim. Failure to have such a facility could result in being refused PI cover, or at best a hike in premiums.
The facts are undeniable. The cost of remaining independent is rising and will continue to do so. Meanwhile, the public’s perception of the value of dealing with a DA firm is no longer the cachet it was.
With higher or equivalent procuration fees more likely to
be available in the AR space, along
with PI cover provided at network level, access to market leading customer relationship management (CRM) systems and a full panel representative of the whole lender and protection market, the only question for me to ask DA firms is when they are going to join a network!