Diversification comes of age

Much like the mobile phone revolution, mortgage broking has evolved from delivering a very specialised service to a diverse range of solutions.

There is little doubt that residential lending remains firmly at the core of the industry’s value proposition. But as the industry has matured a growing number of brokers have expanded their range of services and offering – diversification is now firmly rooted in the mortgage industry.

A new boom

Events over 2008 heralded the end of the residential broking boom – and prompted some much-needed soul-searching in the industry.

Commission cuts, the property market downturn, the exit of some funders and a dramatic reduction in the availability of credit all took their toll, threatening brokers’ incomes and striking at the very heart of their business models.

Brendan O’Donnell, the CEO of Choice Aggregation Services, says these events have had a major impact on the way brokers view themselves and their value proposition.

“Not only are brokers now thinking more about their own revenue channels, they are also recognising their increased value as a vehicle for delivering a range of financial services,” he says.

Mortgage Business recently surveyed PLAN Australia, Choice Aggregation Services and FAST brokers to uncover how they have adapted to diversification and which products are at the fore.

With 93 per cent of the 247 respondents confirming that they offered more than simply residential mortgages, it is clear that diversification is now the rule rather than the exception across the industry.

But while diversification is commonplace, some products are more popular than others.

A significant 73 per cent of brokers now offer life insurance products, for example, reflecting a deepening of the broker / borrower relationship. General insurance is a strong performer, with 57 per cent of brokers also offering products such as home and contents policies.

But perhaps the greatest evidence of how far diversification has come is in the proportion of brokers who offer commercial finance.

Rather than a mortgage “add-on” commercial finance represents a separate revenue stream and an opportunity to tap into a new client base.

At 70 per cent, close to three quarters of respondents now offer commercial finance, highlighting the reduced dependence on residential lending as the sole income stream.

This result is supported across other key product areas, with 60 per cent of brokers now offering equipment / leasing finance, 51 per cent personal finance, 34 per cent cash flow finance and factoring, 30 per cent financial planning and 23 per cent property buying services.

The broker benefit

Finding extra, or more secure, sources of revenue has no doubt been the driving force behind the growing shift towards diversification as brokers have searched for ways to compensate for reduced commissions and declining residential business.

“It’s fair to say that a percentage of brokers have recognised the value of a diversified product offering and have done so for many years,” says Mr O’Donnell. “It is only now that we are seeing the broader industry awaken and embrace these opportunities.”

Nonetheless, for the majority of brokers diversification has only grown their revenues marginally – but enough to make it worthwhile. >>

The Mortgage Business survey revealed that through diversification 40 per cent of respondents have increased their revenues by up to 5 per cent over the last 12 months while just over a quarter, or 27 per cent, have added between 6 and 10 per cent to their bottom lines.

Just 18 per cent said revenue was up between 11 and 20 per cent while 10 per cent reported a 21 to 50 per cent increase in revenues. Just 5 per cent of brokers said revenue had increased by more than 50 per cent.

While the potential to generate extra income is an obvious advantage of having a diverse product offering, other key benefits include a stronger customer value proposition and the opportunity to strengthen existing relationships.

“Stronger broker / client relationships are the backbone of any sustainable broking business and that means having solid relationships with the client,” says Mr O’Donnell.

“The more touch points that a broker can have with the client the stronger and more productive the overall relationship. For clients that means ensuring their needs are met; for brokers the benefit is by way of greater remuneration.”

Of course diversification doesn’t always involve the broker delivering the add-on service themselves. Some are instead referring business to another provider in return for a commission.

Gerald Foley, the managing director of National Mortgage Brokers, says this is the best strategy for brokers who are looking to assist clients with a broader range of financial services, but who don’t want to necessarily provide all those services in-house.

“The move into broader insurance and investment products will suit only a smaller number of brokers and isn’t really a necessity for them to survive going forward,” Mr Foley says. “An ability to play a greater role in assisting their clients with a broader range of financial services – without necessarily providing the physical fulfilment – will be the best way for most to evolve their business.”

---------------------------------------

CASH FLOW

Helping clients secure capital to grow can be a solid revenue generator for brokers.

Cash flow finance is a product proving to be a popular add-on for brokers, with more than a third of respondents to Mortgage Business’ diversification survey now offering it.

Cash flow finance – which includes factoring, invoice discounting, invoice finance or debtor finance – essentially works as a flexible line of credit against a business’ outstanding invoices, improving cash flow and providing working capital to help the business grow.

While cash flow finance is a mainstream product in markets such as the UK it has relatively low penetration in Australia – which means it has plenty of growth potential. Demand for cash flow finance is also expected to grow as a result of the current economic conditions.

“As the slowing economy forces debtors to delay payments to business owners in order to conserve cash, this can put a lot of strain on cash flow and interrupt the operation of the business, preventing it from meeting wages and expenses on time, fund new sales or carry the right level of inventory,” explains Greg Charlwood, the Asia Pacific CEO of cash flow finance provider Bibby.

“This has pushed cash flow finance into the limelight, given its ability to offer SME owners and managers funding flexibility and cash flow reliability.”

The nature of cash flow finance also makes it an ideal product for business owners who are unwilling or unable to risk their homes to secure an additional overdraft.

“Cash flow finance is secured by the book debts of the business so in most instances real estate security is not required,” says Wayne Smith, general manager of Cashflow Finance.

“[This] means that brokers can assist their self-employed clients in raising a line of funding which is not going to impact upon their ability to re-mortgage or raise additional capital against their property down the track."

For example, Mr Smith says, if a broker has a business customer who is unable to re-mortgage or raise additional funds against their property because there is a business overdraft secured by a second mortgage, “the chances are we can introduce a funding line secured against the assets of the business to replace that overdraft, thus creating more options for the broker around the property”.

When it comes to selling cash flow finance, most providers give brokers a helping hand with a range of ‘selling’ techniques, which is ideal for those starting out. “The trick is for a broker to introduce the basic concept and if they are not comfortable with the detail to involve us at an early stage,” says Mr Smith.

“We are flexible in our requirements

in terms of information presented. We are just as happy with a name and number of a potential prospect as we are with a full broker completed application.”

---------------------------------------

BROKER INSIGHT

As diversification gathers pace, brokers the nation over are realising the business benefits associated with new revenue streams, but there are also challenges. Mortgage Business highlights some key broker feedback from its diversification survey.

“Handling a lot of other products in-house has not been our priority. Rather, we have sought out other professionals for general insurance and financial planning / life insurance... We take a cut of commissions from the general insurance and life insurance providers but it is more about fencing off our clients by being able to control who they contact for other services.”

Andrew Hill, Expert Lending, QLD

“We have our own financial planning arm, a property mentoring arm and we also now have recommended builders and developers we use to source property for investors. We have just in the last month also become the license holder for Active Money in Queensland. This will enable brokers to offer personal loans, car loans, equipment finance and rent-to-buy for retailers. We are expecting this to take off and [account for] more than 50 per cent of revenue.”

Chris Pullen, Acquire Finance, QLD

“I believe it is in the best interests of our clients that we are qualified to offer a full financial service and that we make it available to every client. From a business perspective the bonuses are increased revenue and reduced risk of litigation due to ‘best advice’ being offered in accordance with our duty of care and professional code of ethics.”

Marion Kilsby, Midas Home Loans, SA

“The future of mortgage broking lies in becoming a trusted adviser to your clients. The new mortgage broker has the potential to become the financial ‘general practitioner’ to their clients, where clients consult the broker on all wealth and finance areas and are appropriately referred to other specialists when their services are needed. This not only enhances the relationship and services to their clients but strongly diversifies the income streams away from a reliance on the banks.”

Tony Pennells, Mortgages Today, WA

---------------------------------------

INSURANCE

Insurance is fast becoming the product du jour for brokers looking to diversify.

Mortgage Business’ diversification survey has confirmed insurance as the most popular diversification product for residential brokers, with 72 per cent of those surveyed now offering life products and 57 per cent providing general insurance.

Mortgage manager Home Loan Centre Australia, which is part of the diversification movement, has experienced a surge in demand for insurance as a result of changes in the market.

“Insurance products are the most popular add-on for residential mortgage brokers and are currently going through the roof,” says HLCA’s Matt Carter.

This popularity reflects the fact that insurance is a perfect fit with home lending according to Gordon Wallace, insurance licensee specialist at NAB Broker.

“It’s quite a natural conversation to move to,” he says.

Tower’s head of distribution support Amie Calvert agrees. She says buying a home is the perfect time for people to think seriously about insurance.

“It is at life stages like purchasing a new home and taking out a new and major commitment that consumers are most likely to drop the bullet-proof bravado and really think about what would happen to them if something went wrong,” she says, such as who would pay the mortgage and take care of the family.

There are a number of ways brokers can introduce insurance into the client relationship – either directly or through a referral to a specialist provider. They should simply choose the option that suits them best.

For brokers who have not yet moved into insurance but are thinking about it, it’s important to be prepared.

Mr Wallace says some brokers find it challenging when clients object to or show no interest in insurance as a product – especially when they’ve come to the broker specifically to talk home loans. He says this requires a skilled approach, such as incorporating a few simple questions about the client’s current insurance cover so as not to take them by surprise.

Ms Calvert agrees. “Like most things you just need to get used to it, find someone to support you with what you do and how you say it,” she says.