Aug 28th, 2010 | Written by Original Writer | Posted in Finance and Money |

The rise and rise of brokerages as one of the most popular ways to source a financial product seems on face value to defy logic. There are brokers for all manner of financial products including credit cards, mortgage and life insurance. But surely… you can get a better deal by just shopping around and then going direct to a financial institution shopping for credit card / life insurance / mortgage product.

Well, guess again. In many if not most occasions, you’ll be better off going to a broker.

Here’s Why

1. Most brokers don’t charge their client’s for their services.That’s right! Most brokers will do all the leg work hunting for the best financial product for you without charging a fee. They receive a commission on sale from the financial institution so you pay nothing for their services. If your broker asks you for a fee to start work on your behalf? Change brokers.

   Hang on a minute I hear you say… if the bank is paying the broker a commission then that commission has to be factored into the loan so I pay more right? Well… no. Not right. Yes, the broker will be paid a commission but it’s much cheaper for banks to outsource their sales force to a brokerage than to have to pay for sales staff. Sales staff require offices, cars, phones, take sick days, need holidays… and in the event of a financial downturn still need to get paid even when sales volume of financial products is low. It’s much cheaper for financial institutions to outsource their sales force, thus they can sell products through a broker cheaper than through their own sales team.

2. Financial institution can only fit you to the best product they offer, not the best product on offer.Ok. Picture this. You are after some life insurance, so you approach a life insurance company, tell them a bit about what you are looking for… then they recommend a policy for you. This policy might well be the plan most suited to your needs that this company has on offer… but there may well be hundreds of better plans on the market they can’t offer you because their in-house sales staff can only sell you THEIR company’s policies.

   If instead you went and saw a broker, or applied online for life insurance using an online insurance quote form, the broker will be able to check your details against the offerings of dozens of companies and find the best one for you. You’ll get the best product on offer.

3. Financial Institutions compete for a broker’s businessIn most countries, payments from financial institutions to brokers are capped at a certain rate. This prevents brokers from being able to simply recommend the product from which they receive the highest commission. Don’t get me wrong, brokers make more from some products than others but usually comparable financial products attract comparable commissions. So how do financial institutions compete for a brokers business? Price and features.

   a. Price. Lowest possible interest rates. Lowest possible fees.

   b. Features. Eg. Easing of eligibility requirements (former bankrupt, bad credit etc),Most flexible payment methods, discounts for also having a credit card, reduced or no early termination fees etc

   In some cases financial institutions keep certain highly competitive products on offer only to brokers! You might go to the bank, and be offered a mortgage at 6.5%, only to have your broker organize a mortgage with the same bank for 6.25%! True! It happens!

4. You simply don’t have time, to shop around.Just comparing the products of ONE financial institution takes days, and then you’ve got to get the products of another, then another company and compare them… Weeks and weeks of work… And by then the first institutions likely has changed their products and pricing. You could devote yourself to product comparison full time yet still miss out because on the day you go in to sign a contract another organization you’ve already visited brings out a super special which you don’t see.

   Brokers tend to have their fingers on the pulse of the financial products they are brokering. Financial institutions set up feeds and text message alerts to their brokers so that at any time your broker will have the best deals in front of them. It’s quite common to have a broker recommend one product and when you arrive to sign contracts with them… they’ve already found you a better one!

5. Years down the track, expect your broker to be saving you money.Picture this. You shopped around yourself, spent weeks doing it, picked a mortgage, credit card or life insurance policy you are certain is the best and then you signed on the dotted line committing yourself for an extended period.

   Then two years later… other institutions are now offering better deals. Even your own institution may be offering better deals to new customers… but do you think YOU are going to benefit from this? Of course not. The financial institution already has you as a customer so you are not a priority for them. Existing customers are often not given the opportunity to take advantage of new deals… in fact they are often not even told about these new deals.

   If you’d got your life insurance or mortgage through a broker and 2 years down the track your broker realized they could now save you even more money by moving you to a new deal with another company? Expect them to call you and organize this new, better deal for you.

   Your broker has no loyalty to any one financial organization, they get paid for selling financial products… so it’s in their interest to keep shopping around on your behalf even after you’ve signed your contract because if they can find you an even better product down the track… they’ll get a 2nd commission.

   Remember, the best a bank or insurance company will ever offer you is their best priced product as of today whilst a broker can offer you their best priced product OF ANY day.

6. Brokers understand formsThere are serious ramifications of filling out a mortgage or life insurance application form. The details of your form will go on the public record for other lenders or providers to see. Sometimes, it’s a one shot deal to get an application right.

   It’s not about telling the truth or not, it’s about disclosing information that you need not have disclosed.

   Example

   A life insurance form may ask if you’ve ever suffered kidney disease. You may have had an infected kidney at some stage… so you tick “Yes”

   Having had a single kidney infection would likely not be considered kidney disease so you’ve completed this form incorrectly and it may prevent you receiving life insurance from this company.

   Worse, when you go to the NEXT life insurance company to fill out an application there may be a question. “Have you ever suffered from Kidney disease or notified another Life Insurance Provider that you have previously suffered from Kidney disease”

   You are trapped. Even though you have never suffered from Kidney disease you will potentially be treated by other insurers as if you have.

   Your broker will understand all the traps and pitfalls of filling out a life insurance or mortgage application and well know the potential serious and permanent results from filling one out incorrectly. They can help you with your application, where a financial institution will not.

   Summary

   If you are looking for pretty much any type of financial product… By all means shop around to get a bit of idea about the market. Checkout some companies online, go and speak to your bank manager etc.

   But then do yourself a favor, and get in touch with a broker.

Ned Vedo is a Life Insurance Broker of 30 years experience and is the proprietor of the Life Insurance Brokerage www.insuranceshoppers.ca.

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