The "In's and Out's" of Ethical Commissions

Posted by Aaron Sice on 28 May 2010

Tags: development application, land development, residential development, perth

“Great…” - I can hear the sarcastic undertones already.

Another professional and/or politically correct term to bandy about – like impossible to regulate “green loans” (or just using a picture of a tree in labelling to sell something), the oxymoron “negative growth”, the entirely fabricated “potential win-win situation” whereby one side is an accepted compromise, the never-gonna-happen-while-a-man-runs-the-show “equal pay dispute”…

But I digress. Let me start from the beginning.

Commissions are an incentive based payment method, whereby the more one sells, the more one is remunerated. They’re generally worked on a percentage rate of total sales – ala your New Housing Consultant might get a 2% commission for every house they sell. However, they can also be a flat rate – ala some used car salesmen (no, I’m not PC, I refuse to use the term “carperson”) operating on a $2000 per car sold, etc.

Referred deals generally get a “spotter’s fee” – I’m sure you’ve all heard of this one. Find another bookkeeper for the company and there’s a $500 bonus for you, find me a block of land and there’s a $10,000 referral for you, anyone who can get 50 people to sign this petition gets a dinner for two voucher – all basic incentivised commissions…

… and there’s nothing wrong with this. Not at all. Not one bit. It’s called doing business. The cost of a company or person paying out the spotter’s fee or commission is a small price to pay across the broader financial picture.

Financial Planners were not required, at one point in time, to disclose the commissions that they would charge, or the commissions that a certain fund or institution was paying as incentive to get clients. It wasn’t until the first quarterly financial statement that people placed in these products and services found out they were paying a 3% commission to the Planner, plus a 1.5% entry fee on top of 0.75% of the remaining value in a one-off registration fee with a 4.0% exit fee – oh and by the way, the fund was down 15% over the quarter. Yes it happened – a lot. That’s why the Financial Planning system has been regulated by Federal Legislation to disclose all commissions payable, fees associated, break costs etc all outlined clearly and verbally explained to you at the point of transaction. It’s not just enough to provide a PDS in this industry in the hope you both read and understand what’s written.

And it’s not just FPs that wore the Legislation. Mortgage Brokers copped it as well as they, too, operate on a commission basis in a financial industry.

Before the legislation, this was an “Unethical Modus Operandi” in my opinion. Hiding what you’re charging until a rude shock at the end doesn’t win repeat clients.

So what’s an “Ethical Commission”…? I would say, any of the above accepted, lawful or entrenched values of payment. Or maybe there’s a better way?

Building Brokers are not currently required by legislation to disclose their commissions. That’s right; they refer a deal to a selected panel of builders for a best price scenario to be laid out in front of you – it’s exactly the same as a Mortgage Broker. You’ve just paid a sum of money upwards of $10,000 for your lot to be surveyed by a licensed Surveyor, have an Survey Strata Plan drawn up and lodged to the WAPC and Landgate (incl stat. fees), get some designs drawn by a local Designer or Architect and lodged to the council for a Development Application (incl. fees) and in most cases, you still don’t own the copyright to the plans over your lot.

Now let’s not tar them all with the same brush, either. I can think of four reputable BB firms off the top of my head, as I write, that give full disclosure. I can even name three that give you full copyright as well.

But, if you sign with a Building Broker, let’s be clear. Nineteen times out of twenty there’ll be a commission for the Broker, from the Builder, built into your contract. You won’t see it, because all Builders tend to give Fixed Price Contracts. Even if they give you an itemised break down, each cost may include a further small percentage of commission across it (a $90 oven upgrade plus the Broker’s 4% comm. is $93.60, rounded to $94, plus the tiles upgrade, plus the window treatments, plus …). Don't be shocked, as I mentioned earlier, it's standard industry practise.

My point? Ask. If they give you a square look and tell you outright, great! I would call that reputable and ethical. They’re not obliged to tell you anything; but they did when they were asked, as a courtesy to a valued client.

If you ask, and they squirm in their seat – well, I shouldn’t have to spell out your next course of action.

But, personally, I feel there’s a better system.

If I refer work to a builder, I generally don’t charge a basic commission. Sometimes I will, mainly with larger, one-off designs. Heck, I don’t even add margin for outsourced service like is accepted industry practice. I have an idea, and it goes a little something like this…..

If I can save you money, you give me 15% cut of what I saved you.

Let’s say you come to me with a $100,000 build price. I turn around and manage to present a $90,000 build price for the same product with the same specification. I’ve now saved you $10,000.

If you agree to this, then as a referral of business to the Builder (commission), I ask them to add $1500 (15% of $10,000) to each contract and you’ve still saved $8500 per contract. This is built into the base price of the house and is now an itemised cost. However, that $1500 commission is only a 2% commission across the total $90,000 value, just over half of the accepted building industry standard.

Let me know your thoughts on my proposed “Ethical Modus Operandi” – after all, it could be a “potential win-win situation” for everyone involved….

I look forward to your comments.