A broking business built around deep client relationships will not only return substantial repeat business, it can open up a wealth of opportunity to diversify revenue channels
The mortgage broking industry has probably changed more over the last 12 months than in the last 12 years. The number of lenders and products available via the third-party channel has shrunk, the economy has faltered and lending volumes have slowed dramatically.
Brokers have also had to come to terms with widespread commission cuts.
But necessity, so it is said, is the mother of all invention. And while there is little that brokers can do to change current market conditions, they have the power to decide how they adapt. For many, that has meant a move away from transaction-based broking.
“If you look at everything that’s unfolded as a result of the mess in the United States, a new approach to selling mortgages is emerging,” says FirstPoint NB director Troy Phillips.
Mr Phillips is just one of many brokers who are now gearing their businesses around providing tailored solutions to help clients achieve their financial goals. But while Mr Phillips has embraced advice-based broking, he says not everyone will.
“You need to have the ability and the desire to change,” he says, adding “there’s definitely a niche opportunity for brokers who can provide better service”.
The advice debate
What in fact constitutes ‘advice’ is a hot topic in the industry right now, for obvious reasons.
Some brokers are wary of the potential legal pitfalls involved in giving specialist advice to clients. Others mistakenly believe that providing advice entails charging a fee for their services. Still others either find the approach too difficult, or find the concept hard to grasp.
While there are plenty of brokers who already take a consultative approach to their business – and many who already feel they offer advice – there are still no shortage of those who don’t.
MFAA CEO Phil Naylor says confusion around the issue of where the line between providing guidance on products and services, and providing advice that will be subject to regulatory requirements falls, often deters brokers from going down the advice-based route.
He says there is nothing to stop brokers from providing advice that is aimed at helping their clients make the right decisions.
“Any MFAA member is entitled and equipped to provide advice on home loans,” says Mr Naylor.
“Most consumers go to a broker for advice on their mortgage, which is fine as long as brokers aren’t providing advice as described by the Financial Services Reform Act,” he said.
Under the Financial Services Reform Act 2001, all individuals who provide incidental personal or general financial product advice to retail customers must meet the minimum training standards as outlined in ASIC Regulator Guidelines 146.
Are you an advise-based broker?
Adopting a new mindset to the broker/client relationship opens up a new world of opportunity for brokers to build solid and long-lasting client relationships. It is also the basis for opening up strong new revenue streams whether through introducing additional products or building lifelong business relationships.
One common stumbling block for brokers in discovering new opportunities is that they often assume a client only wants a home loan. But what a client wants and what they actually need can sometimes be worlds apart. That means brokers need to dig deeper and get the client to open up.
“If we really engage the client, we can uncover what is really important to them,” says David Fox, principal of Advice Centre Consulting.
“They might want a cheap home loan but they might need protection for their asset and future income, or a repayment strategy for their different life phases,” he says.
This is a major advantage of the advice-based model: the broad range of advice-based products and services the broker can offer the client over the medium- to long-term.
An obvious example is insurance, although there are really no limits to the range of services a broker can provide by adopting an advice-based approach – provided they have the required qualifications and training.
Mark Forsyth, managing director of Firstfolio, says brokers with a diversified product offering will be best positioned to create “stickier” clients – those with whom they will forge long-term and potentially lucrative relationships. And building long-term relationships will be critical in the current environment.
“In any industry, if you have only one income stream, you’re pretty exposed,” he says.
Building on solid foundations
Brokers helping clients with their first house purchase – often the biggest transaction of their lives – have a perfect opportunity to forge a relationship that extends beyond the initial home loan.
Armed with an understanding of the client’s financial situation and needs, the broker has an ideal platform from which to speak to their client about other products and services.
“The most obvious, and logical product would have to be insurance,” says Mr Forsyth. “Whether its income protection insurance or home and contents insurance, insurance is something clients often forget about. The broker already knows their client’s circumstances, and property value. They only need the same information they did for the home loan.”
Self-managed super funds (SMSFs) are another logical area. Many people would like to invest in a second property but do not have the cash to service a second loan. A SMSF can allow them to do this.
What products are appropriate for brokers to offer their clients will of course depend on their needs and what stage of life they are at.
The broking industry’s most sustainable long-term value proposition is through forging deeper client relationships. The move towards advice-based broking however requires an entirely different approach to the broker/client relationship, one many brokers will find hard to adapt to.
It will require a shift from order-taking to a more results-orientated approach. But the end result will be stronger connections with clients and more referred and repeat business.
CHANGING THE BROKER MINDSET
Some brokers may find it difficult to adapt to a new way of engaging clients. In the current market however, a new approach to client relationships will be essential to remaining competitive. So why should brokers adopt an advice-based model?
“I admit I am biased towards the advice model, but there are so many positives,” says David Fox, principal of Advice Centre Consulting.
“Brokers will be able to satisfy more clients according to their needs rather than just finding a solution to their immediate wants. The logical extension of delivering more value is being able to attract more clients, retain more clients and even charge more for services. All of these will help a broker to grow their business and withstand the changing market.”
LENDER AND AGGREGATOR PERSPECTIVE
It’s still a topic open to heated debate: what exactly is advice-based broking. Mortgage Business asked some of the industry’s leading figureheads to share their views
Since the sub-prime crisis and the amount of media the mortgage industry has attracted, consumers have taken a more considered approach to choosing products and home lenders. This is great for brokers that can offer the “choice” value proposition and over the next few years “choice” is likely to evolve into an “advice” value proposition as increased regulation of the mortgage sales process is introduced, lenders put a greater emphasis on cross-sales and increasing numbers of Gen Y enter the property market. This doesn’t mean all brokers will need to become “trusted mortgage advisers” because there will still be a big market out there, but the days of thinking about mortgage broking as simply a sales origination model may be numbered.
Steven Heavey, general manager of third-party and specialist distribution, St George
Brokers already provide advice. There has been a lot of talk about looking at clients’ longer-term needs and in the case of sophisticated investors this is very important. However the vast majority of borrowers are just after a loan for a house they want to live in – their biggest need is for a loan that can be settled in time for them to secure the property and which meets their price requirements. We have developed systems for our brokers which enable them to do this, that is provide advice around product features, prices and so forth.
Alex Moulieris, head of broker platforms, Challenger Mortgage Management
It’s important to define advice as there’s a lot of confusion around it. Our view is that it’s concentrating on the ongoing needs of clients in contrast to undertaking a simple transaction. We’ve reached an inflection point [in the industry] and are moving towards the provision of longer-term, broader service. What happened in the market has provided the industry with the opportunity to think about change – it’s often change that prompts us to consider the status quo. An advise-based model shows a more professional approach; it also provides brokers with the opportunity to reposition themselves and offer more products.
Matt Lawler, regional general manager, NAB Broker
Many brokers have developed very successful businesses by providing customers with accurate information on mortgage products to assist them make the best decision for their financial needs. Currently brokers cannot give financial advice unless they are qualified to do so. Following regulation, some brokers may choose to alter their business models so as to diversify their revenue stream by providing financial advice under an AFSL.
Kathy Cummings, executive general manager third party banking, CBA
EXPANDING YOUR ADVICE CAPABILITIES
While an advice-based approach can help create sticky clients, Oceanic’s Lindsay Rowlands explains how up-skilling can open up potential for additional revenue.
As the mortgage broking industry matures it is embarking on the same transformation the financial planning industry has gone through over the last decade: competitors are forced to start differentiating their offering and add more value to their customers in order to win and retain their business.
The urgency for this transformation has been further reinforced by the recent turmoil in the industry, including commission cuts, limited access to funding, tightening lending approval criteria, and softening consumer demand for lending.
Despite the fact that the industry is maturing and feeling the squeeze, there is still plenty of room to create competitive opportunity for those who will be able to successfully demonstrate value to their customers. Hence the new industry mantra: ‘goodbye transactional sales, hello holistic advice and value-add service’.
Customers are becoming aware of broker commission and fee structures and increasingly seek value for money. That value is professional advice; for many customers a finance or mortgage broker is often the key (if not the only) professional involved at a point of making one of the most significant financial decisions of their lives. Hence they increasingly demand expert advice around how to structure their borrowings, their repayments or secure their loans.
Any meaningful discussion around any of these decisions must be made in the context of customers’ personal and financial circumstances, and must take their overall financial objectives in consideration. This is where financial planning comes to play.
Creating sticky clients is all about having a close and deep relationship with a client that focuses on their overall goals and objectives. On one level this can relate to a client’s debt requirements and associated products that don’t require any other training or qualifications. However if a relationship of trust exists with a client there is no reason why a broker can’t be a trusted source of information for wealth building and other financial products as well. With these other products training will be needed however.
In order to add financial advice to their scope brokers must have an AFSL. They have two basic choices of how to go about it – either secure their own AFSL or become an authorised representative of an existing AFSL holder.
Most start-ups choose to join an existing licencee as the process of applying for their own licence can be quite time and resource heavy. In addition to that, operating under a licence requires those who provide financial advice to outsource a financial planning platform, look after their own compliance and product research, build their own brand, train staff, etc. A financial planning dealer group would typically provide (all or some of) those services to their Authorised Representatives.
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