The Adviser, in partnership with Genworth, recently hosted its annual aggregator luncheon. Along with discussing the Streets Ahead report, no topic was left off the table and, as always, the afternoon made for some lively debate...
For your group and your brokers, what’s the burning industry issue?
Mark Haron: I think it will be the Murray Inquiry [Financial System Inquiry] and issues around conflict of interest. That will have huge ramifications for things like commissions, and as aggregators, I believe we need to lead the way – we all need to make sure we don’t create greater scrutiny for our industry around commissions. Commissions are already a conflict of interest because of the variations in the amount of commissions that are paid out. However, they have become a very good mechanism to ensure borrowers have greater access to more competitive products. If we don’t get disclosure on these sorts of things spot-on, then we’ll come under more scrutiny and we may not have the opportunity to have those commissions.
Vaughan Fowler: The biggest issue for Aussie is recruiting and retaining high quality brokers and franchisees. Even though the business is performing as well as it is, people aren’t knocking on our door, and the reality is we have to go out and find them. I think the biggest industry challenge is how we reignite the first home buyer market and, as an industry, I think that’s a real issue and I can’t see any solutions on the horizon.
Stephen Doyle: It’s been a big coup for us to get Bank of China [on our lending panel] and to be able to bring those guys to the market. In terms of the rest of the market, we’re seeing 49 per cent is now for investors and only 3.7 per cent for FHBs, and that difference is absolutely enormous. The fee-for-service debate keeps coming up, and that is going to place pressure on commissions.
John Kolenda: At the broker level, you’re getting very sophisticated businesses trying to embark on strategies to grow their business. How do they get new people into the business? How do we make the broader product offering easier for the broker and their customers? Currently the process is disjointed and really complex, and if we want this deeper relationship with customers, how do we offer simplified solutions for customers? There are products we have on our panel that brokers just aren’t using.
Brad Wood: Three years ago we embarked on a move into the financial planning space and that is keeping us very busy, and for us, that’s about getting our technology platforms right moving forward. The big thing for Astute is helping the customer through the financial maze. Recruitment too, remains an issue.
Tim Brown: The challenge over the next 12 months will be the government. Their effect on consumer confidence is already impacting now, and the lack of cooperation amongst the parties is impacting on taxation, investment… just about everything. Without a clear mandate, this country will struggle unless we get some good leadership very soon.
Tanya Sale: This idea of fee-for-service keeps coming up, and when I hear that, it really gets up my nose. The media keeps on about it, aggregators keep on about it, and it would all go away if the lenders stopped with commission incentives because that was the downside of the financial planning side. That is why FOFA came in.
Neill Rose-Innes: Recruitment will be a big challenge for us, and market share has been a laggard for us. We think, with our brand, we should have a bigger footprint. We think our broker productivity is pretty high, so to get more market share, we’re going to need more foot soldiers – people on the ground doing the job. The second thing is our transition to a financial planning business. Our challenge is finding the right advisers to join our planner network, and that’s been a little slower than we’d probably like.
Genworth recently released its September 2014 Streets Ahead Homebuyer Confidence Index. Bridget, can you give us a bit of background on this report?
Bridget Sakr: Streets Ahead is our biannual study of consumer attitudes and behaviours as they relate to mortgages and the property market. A key component of this report is our Homebuyer Confidence Index, which takes into account debt servicing, mortgage stress, appetite for property purchase and comfort with borrowing. I believe that our most recent edition contains many revealing insights and I’m looking forward to hearing your thoughts on some of the key findings.
The report found that one-third of Australians don’t own their own homes, with the biggest impediment being the deposit. What can governments, the RBA, lenders do to encourage first-time buyers into the market?
Vaughan Fowler: It’s great to see FHB confidence increasing, but it doesn’t appear to be translating into FHBs transacting. It’s all about confidence, and confidence is driven by fear – fear of unemployment, fear of rising interest rates. If unemployment rises, that will flow on to homebuyer confidence. It’s all cyclical. The market gets strong, the developers come in, they start building up, prices go through the roof, it all slackens off and everybody pulls out. Aussie’s view on FHBs – driven by John Symond’s view – is that there is no incentive to build housing in [Sydney’s] outer western suburbs. It’s expensive for developers to build out there, so Aussie’s view is that any government intervention geared towards FHBs should be geared towards houses and new developments in areas where we want the population to grow.
Tim Brown: The Master Builders Association put an interesting report to the government around housing affordability and the MFAA joined them with what we wanted to see changed – taxation was the biggest problem. Fifty per cent of a new home is in tax. If the government reduced those taxes, we wouldn’t need to incentivise FHBs.
Bridget Sakr: There seems to be an increasing trend towards FHBs buying investment properties as a way of getting into the market. They’re staying at home for longer to avoid paying expensive rents and then sometimes buying an investment property with others such as siblings or friends.
The report showed that an increasing number of borrowers are using personal loans and credit cards to find their deposit. Is that reason for concern?
Stephen Doyle: That’s a huge worry. The average loan in NSW is now $545,000 and that’s gone up $50,000 from last year. So if you’re adding a credit card or personal loan onto that, which are at much higher rates, then that’s a recipe for disaster.
Tim Brown: The fact is that it’s never been more affordable to buy a new home. But we have a generation here that just spends and spends. [Vow] had a young couple the other day making $400,000 between them, and they couldn’t save for a deposit. They were spending $50,000 on vacations, $50,000 on dining out. It’s about priorities, and I think people’s greed could really come back to bite them.
Tanya Sale: If the stats are showing FHBs are using credit cards and personal loans [to find their deposits], then let’s see the stats on hardship in the next 12 months.
Stephen Doyle: You look at young people these days. They live in their parents’ five bedroom home into their late twenties, they drive their parents’ BMW, their first home is an investment property; I don’t think they want to live in what they can afford. I think the reality soon bites.
Tim Brown: The other thing to remember with FHBs, back in 2010 and 2011 there was a lot of government incentives, and that brought forward a lot of that aggregate. Do I advocate those incentives? No way. I certainly never got them.
The other finding from the Streets Ahead report was that mortgage stress almost halved over the past six months, from 28 per cent to 15 per cent. What do you put that down to?
John Kolenda: Conditions are ripe, rates are low, and I can’t recall a better time than now for consumers to play down debt, and get a sense of security. Another thing with FHBs is that their lifestyles are changing; they don’t want to own a home. Look at the European market – it’s more sophisticated than ours, and most people over there rent their entire lives. Maybe these Gen Ys just don’t want the house in the suburbs with the bad public transport. I think our mindset around what these consumers actually want in a home has to change. One of the biggest industry issues when it comes to aggregators has been banks buying some or all of them. Are concerns around this justified?
Mark Haron: There are no issues that I can see around CBA’s ownership of Aussie, and from Macquarie’s perspective, they’ve not offered any incentives to us or any Connective broker to sell more of their products. That’s not what it’s about. There’s nothing stopping any aggregator going out and finding their own funding, getting their own securitisation, putting that product on their panel and incentivising their brokers to sell more of it. We need to get past this idea that bank ownership is bad.
Brad Wood: I think it’s an absolute beat up. We [Astute] don’t have any banks on our share registry and I don’t see it as an issue. And, at the end of the day, it’s about confidence in the industry, and maybe the reason these lenders buy in to aggregators is because they’re good businesses.
Tim Brown: Macquarie owns a percentage of us [Vow] too, and for Macquarie it was always more about a blocking statement than an ownership statement. Our number one lender is Westpac, and they have absolutely no ownership of us whatsoever.
Vaughan Fowler: Ever since CBA bought into Aussie, their share of our business has declined significantly.
Stephen Doyle: Macquarie owns 10 per cent of us and we’ve had no involvement with them whatsoever. No-one is sitting on the board, there’s been no distribution channel from them, they’re not one of our own funders for our own product. They’re totally there from an investment point of view. And, yes, there are some aggregators out there who are incentivised for selling their own product, and that is obvious.
Neill Rose-Innes: CBA owns 17-odd per cent of us, and then there’s eight per cent through Colonial. Neither have any involvement in our business. We fund our Mortgage Choice product through Macquarie and we’ve not seen any influencing of what we do. Traditionally, our top two lenders have been ANZ and CBA and that’s been consistent for years. Plus, I think most brokers have their own two or three preferred lenders, and why are they a preferred lender? Because they’re getting good service.
Brad Wood: I think it’s wrong to say that because a certain organisation owns a certain aggregation business, that’s going to lead to corruption or whatever. They’re all individually owned businesses and irrespective of the ownership structure, if they’re not providing customers with the service, the pricing, then customers won’t go there and the broker will change aggregators. The whole thing’s a beat up and the industry has much more pressing issues.
Asian investors are dominating the headlines. How do brokers tap into this very lucrative market or, in reality, have many missed the boat entirely?
Tim Brown: Chinese will deal with local brokers so long as there’s that trust thing. It takes time to build those relationships and language barriers do cause issues. So Chinese brokers do tend to attract the overseas borrowers and they tend to have sales offices based overseas in Beijing or Shanghai. Australia’s seen as a very attractive place to invest…
Mark Haron: …and that’s because Canada and the US changed their lending criteria and made us look more attractive.
Tim Brown: Australia is seen as a good place to invest, but that will change as yields reduce – there will be oversupply in some areas. But oversupply isn’t necessarily a bad thing. If you think of the massive infrastructure investment that’s gone on [in Australia] thanks to the Chinese, the other thing here is they’re not building units to Australian requirements, they’re building them to Chinese requirements. They’re much smaller and Australians won’t live in a two-bedroom, 50-square-metre unit, so you’re already seeing areas where these units are prolific as being real problem areas.
Technology is often regarded as the prime reason a broker would switch aggregators. What big innovations can brokers expect on the tech front?
Vaughan Fowler: Technology is moving away from customer interaction towards technology that finds clients, keeps clients, and builds relationships. I think we’re already there with many of those platforms.
Stephen Doyle: The best technology will save a broker so much time, where brokers aren’t double entering, and that enables brokers to get things done quickly, giving them more time to prospect and to run their business.
Neill Rose-Innes: Technology is shifting to customer-centric stuff, and the banks do this very well. You walk in to any branch and they know your customer history. It’s all about CRM [customer relationship management] and a move towards broker customer assisted tools that make the process easier. It may not be automated, but it’s an assisted process and makes the sales process more visual – the graphs etc. – and the extension of that is you can do proper analytical propensity stuff.
We regularly hear that not enough is being done to attract and retain new brokers. Should aggregators be doing more here?
Tanya Sale: I think it’s tough when you start in this industry. You come in, you don’t have a client base, and that puts a lot of pressure on their aggregators. All the new entrant really wants are leads, but the consumer doesn’t want to deal with someone new to the industry that has no idea, and I think that’s a very dangerous situation.
Neill Rose-Innes: I think there are plenty of candidates who want to be brokers – finding them is not the problem. It’s about making your offer compelling, interesting and exciting, and it needs to be clear that, yes, for the first 12 to 18 months you’re not going to make much money. It’s all about what investment you make in these people – training, education, support, compliance. There are plenty of things aggregators can do to get new recruits – that’s not the problem. It’s more about, how do we make these people go on to be a success in the industry?
Vaughan Fowler: We are inundated with applications to become brokers with Aussie. Of every 100 applications, we probably put on five – either we reject them or they reject us. The challenge then is to take them from being very inexperienced to being successful, and the people who do drop out along the way do so because they didn’t earn the income that they expected they would. The ones that stay are the ones that do earn well. Our turnover of brokers is now less than 20 per cent, and the way we’ve done that is to have a very structured program in place that takes them from knowing very little to being in a position to be a success. Unfortunately, when they do become a success, they get poached!
Brad Wood: I think there’s still a culture in this industry that we stick a new entrant on a one-month, two-month or six-month training course and say, off you go. But what we’re finding in our business is a lot of the new brokers are being employed, it’s not just commission-only. That gives them time to find their feet, and our licensees understand that they have to invest back into their businesses, and that includes paying wages, training and mentoring people. The one-man broker running his business from the back of the car? Those days are long gone. It’s no longer get your piece of paper, put up your shingle and hope you survive. It’s got to be more than that.
John Kolenda: We have a lot of data on broker experience, and the typical tipping point whether a broker succeeds or not is around the six- to nine-month mark. One thing we do know is that if they survive nine months, it dramatically increases their chance of remaining in the industry, and if they get past 12 months, then it’s nearly guaranteed they will stay. At the end of the day, [new brokers] need to understand it’s not some PAYG job where someone will sit and read you through the policy manual. It’s a highly complex business where, if you really have the fortitude and motivation to want to succeed, you probably will.
The big four have all recently improved their broker commissions. Could we see more movement there as banks chase more business?
Mark Haron: Some of the key things have been getting NAB and CBA over the line on first-year commissions, and that was pretty much the gap that was missing. What we’ll see going forward will be banks using short-term commission incentives in certain periods, along with very good pricing, to grow their portfolio when they need to. I think we’ll see that happen for interim times, one or two months, when a bank says, ‘Shit, our numbers are down – let’s get some adjustments’. But in terms of the overall commission structure, I don’t think we’ll see any significant changes to the base level of commissions right now.
Tim Brown: Lenders will always use commissions to try and win market share for a period of time, but that’s a game you can only play for a short period. What I would like to see is the Australian Office of Financial Management make our regionals more competitive, give them the same opportunities that the four majors have. For me, that would improve competition by miles. For the Financial Services Inquiry to say competition is fine is absolute rubbish, because that’s in the good times – it’s in the bad times that they need to worry.
Vaughan Fowler: I think commissions are reasonably stable. Sure, some lenders might make slight changes here and there, but not enough to change how our industry operates. At the end of the day, a broker’s going to make more money by selling an extra loan than they are by getting a small increase in the commission.
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