Strata Managers are wrong about Strata Buildings’ Best Interests
Just strata sayin …
WIFM is a near acronym for What’s In It For Me?
And, it neatly describes the latest attempt to justify strata managers’, building managers’ and other strata fiduciaries’ conflicts of interest.
Recent attention on strata manager receipt of insurance commissions, free training and other benefits for arranging business for their principal/customer strata buildings when it’s in conflict with their fiduciary duties is being justified [incorrectly] with the proposition that these things are in the best interest of the strata buildings [including, in NSW, some new laws requiring strata managers to explain or justify their relationships, commissions and benefits on that basis].
But explaining why it is in a strata building’s best interests that a strata manager gets paid a commission by a supplier of goods or services [or gets other direct benefits, training services, gifts, etc] is trickier than it sounds.
And, in my opinion, almost everyone in strata land is getting it completely wrong because they are focusing on the wrong party in the relationship and mis-identifying the benefits and/or the beneficiary of the benefits, as these four examples demonstrate.
Training improves strata manager skills and performance
Free or subsidised strata manager training by suppliers of goods and services is said to be good for strata buildings and in their best interests because the strata manager’s skills improve, they are more up to date, it results in improved compliance levels, and the manager can provide better services.
But, it’s table stakes that a strata manager has adequate knowledge and skills to competently manage strata building operations, records, etc, in ways that are timely, legally compliant, according to the strata building’s instructions and error free. And, if doing so needs licences, offices, equipment, software, operational and compliance processes, staff, ongoing training, CPD, etc, then those things are normal business operating needs and business costs that should be and are usually absorbed by service businesses.
So, getting free or subsidised training benefits the strata management business by offsetting the time and cost it would otherwise have to devote to training and which it could not properly charge to strata buildings.
For strata buildings, all they get from the free or subsidised training is what they’re entitled to under their management contract without the free or subsidised training.
And, presumably, the supplier’s cost of providing the free or subsidised training is factored into pricing structures for the goods and services they provide and that the strata buildings pay for.
Commissions mean strata manager’s charge less
Insurance commissions are said to be good for strata buildings and in their best interests because otherwise the strata management businesses would charge strata buildings more or, [flipping it] that strata buildings would have to pay the strata manager more.
But, is that actually true?
Strata managers might want to and try to charge strata buildings more if they didn’t receive insurance commissions.
But, perhaps they might not [or perhaps strata buildings wouldn’t pay more] for a range of reasons, including.
Competition in the market place on pricing [which already exists] make higher charges less attractive and or impossible.
Strata managers making a commercial decision to retain customers even at lower prices for the continued cashflow benefits and to maintain the capital value of the business of managing more, but less profitable, strata buildings.
The inability of strata managers to demonstrate or sell higher value to strata building customers, leading to rejection of some, or all, of the requested higher charges
The complications and risk associated faced by strata managers of having to renegotiate, approve and sign new management contracts with higher charges might prove to be a dumb move.
But, even if strata management charges increased, strata buildings would have the money to pay the higher charges because they’d receive the insurance commissions and/or the insurers would eventually reduce premium costs, freeing up more money for the strata buildings.
So, the benefits of strata managers being able to charge less for their services rather than competing in a competitive marketplace, having to make commercial cashflow vs margin vs business value trade offs, demonstrating higher value and/or risking customer turnover all flow to the strata management business and not the strata buildings.
Plus, I dare say that in fact most strata buildings would be better off [so, benefit from] having the strata insurance commission money for themselves and choosing how, where and when to spend it.
Strata managers do a lot of insurance related things
Insurance commissions are also said to be good for strata buildings and in their best interests because strata managers do a lot of things in relation to arranging insurance, renewing insurance policies and handling claims for strata buildings. In fact, the 2021 paper A data-driven holistic understanding of strata insurance in Australia and New Zealand prepared by Dr Nicole Johnston for the Strata Community Association, says there are 47 things strata managers do relating to insurance.
But, all those insurance related things are part of the services strata managers agree to provide under their management contracts and are key or fundamental management activities that must always occur.
Of course, strata managers could stop doing insurance related work for strata buildings.
But, would they … really?
Given insurance represents one of the largest single expenditures for most strata buildings, is the thing that guarantees the titles and the values of all strata lots, is critical to financiers lending to strata buyers, and is critical in emergencies and protects strata owners, residents and visitors [and coincidentally also protects strata manager], will strata managers really want to stop handling insurance and become arguably less important to strata buildings and owners and strata insurers?
Strata management businesses would also need to renegotiate, approve and sign new management contracts, excluding insurance services.
And, even if strata managers did stop doing insurance related work, insurance brokers could [and probably should] provide those services since they’re specifically trained in the area, hold full Australian Financial Services Licences [rather than simply being Authorised Representatives], and can give personal advice. Plus, in many situations, insurance brokers are already doing those things for strata buildings anyway.
So, again, the benefits of strata managers performing insurance work to receive strata insurance commissions flow to strata managers who get remunerated for that work when someone else could be [and maybe should be doing it instead] for the commissions and fees they’re already also getting.
Relationships get strata buildings better deals
And, sometimes it’s said that the relationships between strata managers and insurers, underwriters or brokers who pay the commission mean that strata buildings get better insurance coverage, better terms and/or lower premiums.
If so, where’s the evidence of that?
After all the Australian strata title insurance sector has the following characteristics that make it small, homogenous and uncompetitive.
There’s only 5 insurers.
There’s only 18 different residential strata insurance policies [and only 9 policies for commercial/industrial strata buildings].
Most strata insurance policies are very similar.
Premium pricing models for risk are very opaque or unavailable..
Strata managers can’t give personal advice on insurance matters, so they are constrained.
Policy renewals often occur at the last minute and within limited time constraints.
There is strong market evidence that almost all strata insurance is purchased on price only.
Insurance policy negotiation is infrequent except for very large buildings or unique and special risks.
There are no bulk purchase deals for insurance in the strata title sector that have been negotiated by strata managers.
So, this claimed benefit to strata buildings is illusory and non existent.
So, strata managers and others have got the benefits proposition back to front as they rely on things that actually benefit strata managers and not the strata buildings.
Instead, I think that strata managers in a conflicts of interest receiving commissions and benefits trying to justify why those conflicts, commissions or benefits are in the strata buildings’ best interest, need to demonstrate direct benefits to the strata buildings [such as the supplied goods, or services are better [or the best], are cheaper [or better value], and/or are better suited to the strata buildings’ unique circumstances.
So that it’s a real situation of What’s In It for Me … for the strata buildings that is.
Just strata saying ...
June 27, 2025
Francesco ...