Commission clawbacks are an accepted risk of mortgage advice, but in a market where borrowers are more willing to refinance, chase cashback offers or repay debt early, that risk can have a meaningful impact on an advice business
Clawbacks remain a significant but manageable cost for advice businesses – provided they plan for them, says Simon McDonald (pictured, left), managing director and financial adviser at Mortgagehq.
“It’s real, but it’s a cost of doing business rather than an existential threat, provided you plan for it,” he says.
“On a loan that settles and unwinds inside that window, an advice business can end up handing back the bulk of what it earned for doing the work in the first place. Multiply that across a book and it’s a genuine drag on cash flow, even if it rarely sinks a business outright.”
Not every mortgage advice business faces the same level of clawback exposure, but advisers can limit their disruption through careful monitoring, adequate reserves and conversations that begin well before a potential repayment occurs.
Different advice models carry different risks
Alan Borthwick (pictured, right), owner of DUX Financial Services and a Certified Financial Planner, says the impact often depends on the clients an adviser serves and whether the business is focused on individual transactions or longer-term financial planning.
“I suspect advisers operating in a more transactional market, particularly those doing a lot of investment property or refinancing work, are likely to feel the impact of clawbacks more acutely. Likewise, advisers working with clients who are financially stretched will generally face a higher risk of clawbacks,” he says.
“For advisers working primarily with owner-occupiers who have healthy surpluses and are receiving ongoing advice, the impact is typically lower.”
Unexpected events can still affect any borrower, however. A separation, job loss, relocation or property sale may cause a loan to be repaid well before either the client or adviser anticipated.
“Clawbacks are an inherent business risk for all mortgage advisers, but the extent of that risk varies considerably depending on the type of clients and advice model involved,” Borthwick says.
While Borthwick has not personally experienced an increase in clawbacks, McDonald – speaking on behalf of his personal experiences, and not for MHQ as a whole – has seen greater exposure as borrowers respond to interest rate movements and competing bank offers.
“With the amount of rate movement and refixing activity we've seen, clients are shopping around more actively than they used to, and cashback offers are pulling people between banks earlier in their loan term.
“More client movement naturally means more exposure to clawback for the adviser who wrote the original loan.”
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Planning for an unpredictable expense
Although advisers cannot predict every change in a client’s circumstances, they can monitor which loans remain within their clawback periods and maintain reserves to soften the financial impact.
“We track drawdown dates and each loan's clawback expiry against our client base, so we know roughly what's exposed at any point in time and can reserve for it rather than being caught out,” McDonald says.
“What's harder to budget for is the fact that the work itself, the advice, the application, the compliance file, has already been done and paid for in time, regardless of what happens to the commission later.”
Borthwick agrees that precise client-by-client forecasting is unrealistic. Instead, advisers need sufficient financial resilience and clear processes for explaining potential costs.
“Realistically, clawbacks cannot be accurately budgeted for on a client-by-client basis. Like any established business, however, advisers generally maintain sufficient financial reserves to absorb unexpected costs when they arise,” he says.
Both advisers believe proactive contact is one of the best ways to reduce surprises. Regular reviews and early conversations about refinancing, cashback and repayment plans allow the adviser to identify a possible sale, refinance or large repayment before the client takes action.
McDonald says clients need to understand from the outset that an apparently cost-free move between lenders may carry a cost for the original advice business.
“We set that expectation upfront now rather than after the fact. Clients understand from the first conversation that switching lenders or repaying early inside that window isn't free from the adviser's side, even if it looks free from theirs,” he says.
“It's a better conversation to have before the loan settles than after a client rings up nine months later wanting to refinance for a better rate.”
MHQ checks in with clients every six to 12 months, regardless of what is happening with their mortgage. Borthwick also looks for signs that a client’s plans may be changing, including a decision to move onto unusually short fixed-rate terms.
“The earlier clients involve us in their decision-making process, the easier it is to manage potential clawback situations constructively,” Borthwick says.
Are client fees becoming more important?
Client fees are one way advice businesses can recover some of the cost created by a clawback, but the two advisers have adopted different models.
Borthwick has charged for mortgage advice and included clawback fees for more than a decade. He believes the ability to charge successfully comes back to the value an adviser provides.
“If an adviser can offer nothing more than moving a client from Bank A to Bank B and is delivering essentially the same service as everyone else, then it becomes much harder to justify professional fees,” he says.
“Advisers with a genuine value proposition, strategic expertise and ongoing advice have a much stronger basis for charging fees and explaining why clawback provisions exist.”
MHQ has taken a different approach.
“We've recently moved to a flat, role-based profit share structure rather than a volume-driven one, partly in response to the direction COFI has taken on sales incentives,” McDonald says.
“It means our advice isn't shaped by what a refinance or clawback does to someone's personal pay packet, which is the model we think clients are actually paying for, even when they're not paying us directly.”
Where fees do apply, transparency is critical. Clients should know how the adviser is paid, when a fee could arise and why it exists before proceeding.
“The purpose of a clawback fee is not to penalise clients. It is simply to create a fair outcome when circumstances trigger a repayment of commission that has already been earned,” Borthwick says.
“As advisers, our role is to provide long-term guidance, not to take a commission and disappear.”
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A fairer and more consistent model
Both advisers recognise the legitimate purpose behind clawbacks – discouraging advisers from unnecessarily moving clients between lenders to generate new commissions.
However, McDonald would like greater consistency between lenders and more widespread use of clawbacks that reduce progressively over time.
“In practice, the risk sits almost entirely with the adviser and their business, even when the original advice was sound and the client's decision to move was driven by their own circumstances, a job change, a sale, better market rates, none of which the adviser controls,” he says.
Borthwick also favours progressive models, arguing that large stepped reductions can create unfair outcomes when a difference of only a few days substantially changes the amount owed.
He says another imbalance occurs when borrowers make relatively small lump-sum repayments. An adviser may lose some commission even when the client does not have to repay any cashback to the lender.
“In those cases, advisers can effectively be penalised for helping clients reduce debt and improve their financial position. That is one area where I think the balance could be improved,” Borthwick says.
More importantly, an ongoing advice relationship can ensure refinancing decisions are based on a client’s long-term interests rather than the immediate appeal of a lower rate or fresh cashback offer.
Ultimately, clawbacks are likely to remain part of mortgage advice, but clearer, more consistent and progressively reducing models could create a fairer balance for everyone involved.
And for advice businesses, the strongest protection remains good planning, transparent client conversations and ongoing relationships that keep advisers involved when borrowers’ circumstances or intentions change.
