Although time consuming, building a converged business model definitely has its benefits, as The Adviser discovers
In today's challenging market, there are several reasons why brokers should diversify their service offering.
The National Consumer Credit Protection Act has given them extra responsibilities, effectively extending the amount of time it takes to complete each loan application.
With broker commissions cut during the global financial crisis, as lenders looked to shave back their costs, brokers now do more work for less money. On top of all that, credit growth is sluggish and consumer optimism is at an all-time low.
According to the Westpac-Melbourne Institute Index of Consumer Sentiment, optimism has been low for an “extended period of time, despite a substantial 175 basis point reduction in interest rates since October”.
This lack of optimism was reflected in recent figures from the Australian Bureau of Statistics, which found home loan approvals fell for the third time in December 2012.
The number of loans granted to build or buy houses and apartments declined 1.5 per cent from November – suggesting the Reserve Bank’s interest rate cuts are failing to lure buyers into the market.
It is therefore now more important than ever before for brokers to diversify their core businesses to include other financial services.
Diversification not only allows brokers to build sticky, close relationships with their clients, it also helps them build their bottom line.
In a tough market, of course, it makes good business sense to at least try to increase the revenue you make from each and every client.
As Liberty’s John Mohnacheff explains, a broker has all the information they need to write additional products for their client.
They know and understand all of their confidential financial information and can use that to ensure all of the client’s financial needs are met.
“Brokers have everything at their fingertips, so why don’t they offer more than a home loan?” he says.
“By writing additional business with every client, it not only increases the amount of money a broker can make from each client, but it helps them form strong relationships with that client.”
Indeed, diversification is not just about making more money.
While this, of course, is one benefit of building a converged business model, it is not the only reason brokers should look to diversify their core offering.
Diversification also helps brokers build strong relationships with clients.
And, according to Mr Mohnacheff, brokers who offer additional financial services have no problem staying relevant to their client – which ultimately helps them capture the next home loan.
“I firmly believe that for brokers to remain relevant to the customer, they have to advise them on things that go hand in hand with getting a home loan,” Mr Mohnacheff says.
“For many, buying a home is the biggest investment they will make in their entire life, so they should be taking out insurance – which is something a broker can help with.
“Of course, if brokers do not feel comfortable selling insurance to their clients, they can refer the work to another financial professional.
“By doing this, they are effectively building a network of referral partners who can and will refer work back to them.”
Beyond the sale
Of course, a broker doesn’t just have to diversify into other services when writing the home loan.They can offer additional services to their clients over a period of time.
Brokers can approach their clients once a year to complete a ‘home loan check-up’ and, at the same time, they can check their clients’ other financial needs are being met.
MKM Capital’s Michael Watson says brokers who offer their clients additional products and services on a regular basis, even after the original home loan has been settled, not only stay relevant, but guarantee themselves both repeat and referral business from their clients.
“Brokers should aim to play a pivotal role in their client’s financial life,” he says.
“The more services you offer, the more invaluable you become.”
And while stronger client relationships and a better bottom line are both fabulous benefits associated with diversification, they are by no means the only benefits of building a converged business model.
Brokers who diversify can also expect to sell their business for a higher amount when they leave the industry.
“I truly believe brokers who want to run a business cannot be ‘mono-line’ service providers,” Vow Financial’s Tim Brown says.
“If you want to sell your business for a higher recurring trail when you leave the industry, you must have multiple streams of income.”
Generally speaking, a mono-line business is worth anywhere between 1.2 and 1.8 times a broker’s recurring trail.
However, businesses that diversify can earn up to 3.5 times recurring trail.
“Those that integrate general insurance, risk insurance or property management into their business can be assured of earning higher multiples,” Mr Brown says.
In this supplement, The Adviser will not only look at areas into which brokers can diversify successfully, but also how they can integrate these new services into their business simply and easily.
We will also weigh up the pros and cons associated with diversifying in-house and referring business to other financial providers.
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