With lending conditions tightening, remuneration models being refined and the industry facing scrutiny, the question on many new-to-industry mortgage brokers’ minds is how they can sustain earnings growth. Tas Bindi speaks to some of Australia’s top brokers about growing a brokerage through diversification.
Diversification. The word fills some with dread, others with enthusiasm. It seems that aggregators, business advisers and industry bodies have been espousing its benefits for years. While the advice has become somewhat of an industry truism, the rationale behind it remains sound, especially during a period of uncertainty.
According to Jason Back, managing director at Victoria-based brokerage The Australian Lending & Investment Centre (ALIC), diversification is about broadening the types of products that are sold, tapping new client segments and not relying on trail or contract renewals from existing clients for revenue. This, in turn, enables brokerages to dilute their risk and protect their income from future shocks to the industry, because, as he warns, “commissions will change”.
David Garner, managing director at South Australia-based brokerage Go Loans, further notes that “super pro ts in mortgage broking have well and truly gone, particularly after the GFC”, so it’s important for long-term survival that brokers actively pursue opportunities for cross-selling products.
They should also diversify for the benefit of consumers who are increasingly demanding a holistic service, according to Mr Back. The ALIC MD explains that customers forming a relationship with a broker expect that relationship to encompass an array of services — and not just in the field of lending.
“[Consumers] are looking for providers that can be more lateral in their solutions… As a trusted adviser, brokers should not just be a one-trick pony; they should be the first person customers think of when they’re [considering] finance solutions,” Mr Back says.
Additionally, Matt Punter, CEO of Queensland-based brokerage The Savings Centre, says that brokers are one of the early touchpoints in a customer’s financial journey, so having the capability to do more for every client is a “no-brainer”.
“If we’re not talking to [our clients] about their car loans, their insurance needs, their wealth development needs, then someone else is likely to get their hooks into them,” Mr Punter says.
“Many people within the finance industry are looking to diversify within the industry. Accountants are looking to diversify by coming into our patch, so if we don’t extend ourselves outwards, then we risk our trail books running o and our assets diminishing because we’re not actively seeking to retain our clients.”
The early broker gets the worm
A necessary precursor to diversification, according to the brokerage leaders, is monitoring market conditions to identify new potential revenue sources or to find more fruitful areas of finance to focus on. A natural movement from mortgages, they say, is to other forms of finance such as automotive, personal, commercial, agriculture, construction and affordable housing loans.
“Accountants are looking to diversify by coming into our patch, so if we don’t extend ourselves outwards, then we risk our trail books running off." – Matt Punter, CEO, The Savings Centre
Mr Garner, who acquired Go Loans in 2010, says that prior to purchasing the brokerage, it only specialised in home loans. But having previously led a broking firm, the managing director already had a vision for Go Loans being a “holistic” company, and so it started offering other types of loans as soon as the brokerage was established under new ownership.
“There’s no reason you can’t help [an existing] client with other loans — particularly, if [they’re] a self-employed person coming to you for a home loan and then a year later says [they] want to buy a business asset,” Mr Garner says.
“If you can’t help them, they’ll walk to a bank and that bank will take their home loan as well.”
He says that brokers are well positioned to help customers navigate commercial finance, which is one of the more lucrative areas of finance. (It’s also more complex, Mr Garner notes, as it requires additional work such as analysing cash flows, balance sheets and profit/loss statements.)
A notable challenge, according to the managing director, is that the major banks tend to ring-fence commercial customers, making it difficult for them to break free of existing arrangements. He goes on to describe a commercial deal he was working on where the client was using a lender that had “everything cross-collateralised”.
“It’s very difficult to break the whole thing up and get better pricing for [the client]... Each lender tends to tie the [various loans] up, mixing their personal assets (such as their homes) with business loans and commercial property. There are charges over the actual company’s assets as well,” Mr Garner says.
But this is where the broker can come in. “Brokers can individualise [the various loan products] and say: ‘This particular asset is a commercial property, so we can go to Lender A for this, and then go to Lender B for the home loan. [They] can actually present a less riskier [option] for the borrower,” Mr Garner says.
Go Loans decided to take diversification further, providing customers access to a range of specialists such as accountants, financial planners and property investment advisers.
Mr Garner explains that the brokerage has referral arrangements in place with these specialists, who are all based under the same roof as Go Loans but operate independently of each other.
The reason for having such arrangements in place is “partially to help fence the clients in and also refer them to someone who is trustworthy”, the MD says.
“[It ensures] they receive the correct advice and it is expert advice. The advice can also be seamless to the client, rather than sending the client away to seek the relevant advice,” Mr Garner adds.
“It [also] helps the business due to the professional handling and outcome.”
Meanwhile, Mr Punter says that diversification is becoming more and more important for The Savings Centre, which he founded in 2015, because it is attracting “aspirational” clients who are “looking to move forward with property as their vehicle [leading to] a better retirement position or a better lifestyle pre-retirement”.
“I think people are looking for an easier way [to live] because life’s only getting busier. If we can help people move along the life trail more easily and more efficiently, then that’s a win for the [customer] and the business,” the CEO adds.
While the brokerage largely focuses on home loans, Mr Punter says that it also deals with other types of loans such as equipment and asset finance, which has a “strong” return on time investment, and, increasingly, commercial loans.
But the biggest diversification piece for The Savings Centre is insurance. The CEO says that he became accredited with Spectrum to provide no-advice risk insurance in late 2016 and wrote three deals within the first month.
According to Mr Punter, one reason for expanding into insurance, aside from being a “pretty obvious and relatively seamless cross-selling opportunity”, was to ensure clients are aware of the risks of not having adequate measures in place to protect their assets.
“I wanted to put a fence around our clients to ensure they didn’t find another adviser and then get referred through to their finance provider,” the CEO adds.
“I [also] think we have an obligation to raise this with clients, as I believe we may be challenged on this in the future if someone is caught out and they go after their broker legally seeking compensation.”
The Savings Centre, in late 2017, also welcomed an independent financial planner who works two to three days a week out of its Moffat Beach-based office under a paid referral arrangement. Mr Punter says that, especially if there are fees involved, it’s important to establish referral relationships with professionals who are “likeminded, with a similar business and service ethos”.
The CEO, who admittedly wants to avoid “having too many eggs in one basket”, adds that the brokerage has been experimenting with a conveyancing lead generation product this year as part of its diversification efforts.
He explains: “I had a mortgage broking practice inside of a law firm that was a large-scale conveyancing practice, so I’m going back to the roots of that. We still leverage a lot of finance out of conveyancing leads. Initially, we got a few leads from [that experiment] that we’re sifting through.
“I think that’s a diversification piece that is worth considering because it’s easy for real estate agents to refer conveyancing; it’s not as easy for them to refer finance.”
ALIC’s journey similarly started with home loans in 2009 before it branched out into business, commercial and asset finance based on the additional needs of its existing clients. The brokerage now provides access to a wide array of experts — such as accountants, tax advisers, stockbrokers, buyers’ advocates, financial planners, quantity surveyors and legal specialists — that it has built relationships with over “tens of years” under non-paid referral arrangements.
Mr Back says that ALIC has long held the belief that it “would rather surround [itself] with great business partners” than attempt to do everything in-house, although it has never been comfortable with the idea of paid referral relationships.
“If we were to buy a business, we’d buy the whole [entity] than just the trail book” – David Garner, managing director, Go Loans
He explains that the firm has developed mutually beneficial relationships with professionals that do not involve any commission splits to “ensure the integrity of every referral”.
The ALIC MD says: “I’d rather see the client get a fantastic outcome and talk about that outcome to their friends, family and colleagues and get more referrals.”
He points out that there are layers of complexity (including regulatory complexity) that sit behind paid relationships.
“We want to keep a relatively simple business model, rather than overcomplicating it to add an extra couple of thousand dollars a year in referral fees. We can add tens of thousands of dollars [through] referrals that convert to mortgages,” Mr Back says.
For every client ALIC’s partner businesses refer to the firm, the brokerage passes on three or four in return. The MD adds that nurturing referral relationships has worked very well for ALIC, which has nearly $3 billion under management (as of May 2018).
Buckling up before moving along the supply chain
Other than educating themselves to improve proficiency in various areas of finance, Mr Back recommends that brokers speak to their clients honestly about what’s happening in the industry.
“It’s times like these, when there’s volatility — whether it’s around interest rates, property markets or tightening of credit conditions — that [brokers] need to be talking to their clients,” Mr Back says.
“It’s an opportunity to [explain] that the royal commission [might lead to the] tightening of credit conditions and additional regulations across the banks, which means that in six or 12 or 18 months’ time, what you could do today might not be possible in the future.”
There needs to be a shift in the way brokers speak to their clients, the ALIC MD stresses; rather than asking transactional questions, they should be asking aspirational questions.
Mr Back explains: “Rather than [asking questions like] ‘How can I help you today?’, ‘How much would you like [to borrow]?’ and ‘When are you buying property?’, better questions for brokers to ask would be something along the lines of ‘Can you tell us more about your strategy for this property?’, ‘What options have you considered?’ or ‘What are you planning for this investment?’.
“Our industry has got to be about education; we have to add value through educating our clients and developing their skill sets.”
He also suggests speaking to aggregators, many of whom have educational materials for different areas of finance, as well as providers (e.g. lenders) to gain a better understanding of the products on offer as well as the related administrative and compliance obligations.
Meanwhile, Mr Punter notes that diversification opportunities could be buried in customer data, so it could be worthwhile for brokers to analyse their existing customer base. As an example, the CEO says that The Savings Centre, through its own analysis of its customers, identified that less than 10 per cent have a will, and even less have a power of attorney.
“I don’t think there’s much money in transactional wills, but if it is a need for [customers] to get referred to someone who can have a quality discussion with them, then that could be worth [looking into],” Mr Punter says.
Accelerating growth by buying loan books
For some brokers, growth can be achieved by buying loan books. While it doesn’t guarantee customer retention, it can give brokers a boost if the data is leveraged properly.
Mr Back’s advice for brokers looking to purchase a loan book is to conduct a high level of due diligence to understand the quality of the underlying book.
He says: “Who is actually in it? How did those clients come about? What [services] did they receive in the past? Why [were they] with the previous adviser? Buying a trail book can be fraught with danger if you don’t understand the data that sits behind it.
“Maybe you buy a book [with customers] who are on average 50-plus years old, so there might not be any additional borrowing. In fact, you’ve probably got a high run-off rate [between] 15 per cent [and] 25 per cent.”
As such, Mr Back suggests analysing information such as the characteristics of customers, the mix between principal and interest versus interest-only loans, the mix between investment versus owner-occupier loans, income projections and delinquency rates.
The ALIC MD says: “The average book might be running off at 10 per cent to 15 per cent a year, so you have to look at projections. You have to think about how you service that ongoing book to actually earn the trail [and] what you are providing the clients to then [get] referrals.
“You have to [consider] how many first home buyers are in there, because it might mean the clients won’t buy again for another seven to 12 years. So, you’re not going to get new business out of those clients.”
However, for The Savings Centre, purchasing loan books was well worth the “couple of hundred thousand dollars” it paid, according to Mr Punter.
“I’ve never had any luck with just parking an investment somewhere and then not devoting any time to it” – Matt Punter, CEO, The Savings Centre
The CEO explains that he purchased a loan book when he entered the broking industry, sold one when he left, then purchased another when he returned.
While Mr Punter admits that one of the biggest challenges with acquiring another broker’s loan book is the mere fact that “you don’t know the clients, the clients don’t know you, so they have no allegiance to you”, he also notes that it wasn’t the customers in the book that made the purchase worthwhile — rather, it was the access to referral partners.
“We’ve had the [last loan book] for three years now and it continues to yield,” the CEO says.
But loan books aren’t cheat sheets, as brokers will still have to build and nurture relationships with customers, referrers and other lead sources recorded in the books, Mr Punter notes.
“I’ve never had any luck with just parking an investment somewhere and then not devoting any time to it,” the CEO says.
His top piece of advice for brokers that are looking to acquire a loan book is to determine the percentage of loans that are still within their clawback period.
“I would also look at [whether] they have any clawback arrangements. So, have they got the client tied in so that, if the clawback does happen, you can seek compensation?” Mr Punter says.
“We do that with everyone in our books, making sure that they sign what we call a ‘professional services agreement’, [which stipulates] that if there’s any clawback, that will be passed onto the client. The [client] acknowledges this before we do any meaningful work.”
Mr Punter says that the reason for having such an arrangement in place is to ensure that, should the time come to sell the brokerage, he can “confidently ask for the best price in the market because the purchase is safe from any clawbacks”.
He admits that a broker will see a decline in the loan book they purchased over time, but that should not be a problem unless they are relying solely on the existing book to generate recurring income.
For Mr Garner, when it came to buying a loan book five years ago, it was particularly important that the seller was actually exiting the industry, rather than a broker who was selling off a portion of their book to raise quick cash.
But the Go Loans MD warns: “When you [buy a book], you have to put on extra staff to service it properly to get the value out of it. We prefer to grow organically at this stage than buy a book and just slapping it into our system.”
In fact, Mr Garner says that he would rather buy another brokerage.
“We bought Go Loans, which was an established business, in 2010, and we paid 2.2 times [the income]. We bought the name, the brand, the phone numbers, the whole lot. If we were to buy a business, we’d buy the whole [entity] than just the trail book,” the MD says.
Until the broking industry has a clear direction from regulators and government advisory bodies, the brokerage leaders say that brokers should remain focused on what they can control in the meantime, which is growing their business.
INSIGHTS FROM A VETERAN BROKER
Kevin Wheatley, the managing director of 20-year-old brokerage Bayside Residential and Commercial Mortgages, shares his advice on how brokers can adapt to change through diversification
Mr Wheatley, who founded Bayside in 1998, says that the brokerage diversified about four years ago in response to shifting trends in the banking sector. The MD, who is also a logistician, says that he always keeps his finger on the pulse, monitoring global market trends that could impact the business or present opportunities.
“We looked at what the mainstream funders were doing in regard to offering different finance products and ancillary products such as insurances,” My Wheatley says.
“[We were] not just looking at Australia but global market trends, too… I saw the tightening of monetary policy in China. That’s what made [me decide] to take a proactive approach when it comes to business diversity.”
Bayside (which offers services across lending, insurance and SMSF) experienced an increase of nearly 50 per cent in annual revenue post-diversification, according to the MD.
“Becoming a one-stop shop by offering insurance and other services — as well as the ancillary business opportunities that have come along with it — has increased our revenue. We’ve had a good year this year at a time when [others] have plateaued,” Mr Wheatley says.
In addition to providing financial advisory services, Bayside has also established its own managed investment scheme, with Mr Wheatley saying that the brokerage is “moving forward to become a non-bank within [its] own business”.
He notes, however, that it’s “very competitive out there in the private money space”, so brokers should do their research before implementing a similar expensive scheme.
The Bayside MD has two key pieces of advice for brokers who are looking to grow their revenue sources:
Mr Wheatley also suggests monitoring global economies for opportunities while keeping a close eye on cash flow as the broking industry is “in for a difficult 18 months to two years to come”.
“Don’t get involved in expensive IT platforms that are trying to be sold to the industry,” the MD says.
“Go to your industry representatives — the associations or your aggregators — who will introduce you to people [who] provide software platforms that are going to simplify your business and expedite your application process.”
Tas Bindi is the features editor for The Adviser magazine. She writes about the mortgage industry, macroeconomics, fintech, financial regulation, and market trends.
Prior to joining Momentum Media, Tas wrote for business and technology titles such as ZDNet, TechRepublic, Startup Daily, and Dynamic Business.
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