Commission, Conflicts and a Client Who Wants the Cheapest Rate
A lender offers you a volume-based bonus if more than 60% of your settlements in a quarter are placed with them. Their product is competitive on rate but has a $1,200 annual fee and a restrictive offset facility. A second lender has no annual fee, a fully featured offset, and a rate 0.15% higher, and pays a lower upfront commission. Your client, Tomas, has a $520,000 loan, wants to offset a $90,000 inheritance, and has said he wants 'the lowest rate, full stop'. He is unaware of your bonus arrangement and has not asked about it.
1. Analyse the conflict of interest and determine which product you should recommend, with reasoning.
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The conflict. The volume bonus creates a financial incentive to place Tomas with the first lender regardless of his interests. Even if you recommend the second lender, the existence of the incentive must be managed and, where relevant, disclosed.
Product comparison. Tomas says he wants the lowest rate, but his stated need is to offset $90,000. That changes the arithmetic. With the first lender, the offset is restrictive, so the benefit of offsetting may be reduced; the $1,200 annual fee also erodes the rate advantage. On a $520,000 loan, 0.15% is $780 a year. The first lender's rate advantage of $780 is more than offset by the $1,200 fee, before considering the restricted offset. If the offset cannot hold the full $90,000, the interest saving on the inheritance is lost entirely.
Best interests. The second lender is likely to be cheaper on a total cost basis and better meets the stated need to offset. Recommending the first lender because of the bonus would breach the best-interests duty. Recommending the second is the defensible position, supported by a written comparison showing total cost over, say, three years.
The client's instruction. 'Lowest rate, full stop' is a preference, not an instruction to ignore fees and features. You should test it: explain that the lower-rate product costs more once the fee and offset limits are counted, and confirm his priority. Document his response.
2. What disclosure and record-keeping obligations apply to your remuneration, and how should you handle Tomas's stated preference?
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You must disclose your remuneration structure in a form the client can understand, including upfront and trail commission and any volume-based or soft-dollar benefits that could reasonably be expected to influence the advice. The bonus arrangement is exactly the kind of conflict that must be disclosed, even though Tomas has not asked. Disclosure should be specific enough that he can see the incentive, not buried in a general statement.
Obtain his informed consent to proceed after disclosure, and record it. If he still prefers the first lender, document that you explained the fee and offset limitations, that he confirmed the preference, and that he understood the trade-off. If he changes his mind, record that too.
Keep a file note of the product comparison, the total cost calculation, the disclosure conversation, and the reasons for the recommendation. If the bonus is later queried by a compliance review, the file must show that the recommendation was driven by the client's needs, not the incentive. Where the conflict cannot be managed in the client's favour, the correct step is to decline the placement.