Do brokers make good bedfellows?

Those of us who remember the challenges of learning to ride a bike, will know it involves frustration, endurance and mishaps. You fall off, and pick yourself up with even more determination.

But for Michael Driessen, while daunting at first, the decision to diversify his financial planning business into mortgage broking was an opportunity he could not afford to ignore.

Partner and senior financial planner at GDA Financial Services in Tasmania, Micheal Driessen, has joined the growing number of financial planners looking to grow their business in 2013 and diversify into providing mortgage services.

“The reason we’re doing it is that financial planners look at all aspects of clients’ financials,” Driessen says.

“From our point of view, when looking at loans that are not structured properly or [when] the broker hasn’t looked at all the mortgage options, we have two choices. One is to send the client back to the mortgage broker; the second option is that we can take a holistic view and use it as an opportunity to help the client and write the loan ourselves.

“I’d prefer to identify the issues rather than send the client back to the mortgage broker. It’s a business opportunity to become a one-stop shop.”

Australian mortgage brokers are writing around 43 per cent of all home loans nationwide, and this figure has grown every year since 2008.

However, the big four banks – NAB, Westpac, the Commonwealth Bank and ANZ – are the players that dominate the market.

But with the Australian economy returning to healthier levels of growth, the mortgage broking industry is well positioned to prosper in the years ahead.

As consumers begin to understand more about the lending industry and how mortgage brokers can help them, competition between brokerages is heating up.

“The role of brokers in the mortgage lending market is expected to become more prominent, as more borrowers seek an unbiased expert in mortgage finance to help them make this important financial decision,” notes the latest Mortgage Brokers in Australia report from IBISWorld.

Nevertheless, 2013 is unlikely to be an easy year for new home loans. According to a consumer credit expectations survey, conducted by Dun & Bradstreet, fewer than 20 per cent of households expect to take on more debt during the March quarter.

Many brokers are therefore focusing on refinancing as a way to sustain their revenue and avoid the pressures of a relatively flat market.

The federal government’s axing of mortgage exit fees in early 2011 – which did away with exit fees for all mortgages taken out after July 1 of that year – gave a boost to the refinancing market, creating opportunities for brokers.

Not surprisingly, an increasing number of planners are now taking a closer look at how offering a broking service might benefit their business.

Phil Naylor, chief executive of the Mortgage and Finance Association of Australia (MFAA) – the industry’s peak national body – said planners’ membership of the association has grown substantially in the last few years.

“In the last few years we’ve seen our membership of financial planners entering the mortgage broking sector grow,” he says. “While we don’t have exact figures, we do have several hundred members that are financial planners who also do mortgage broking.

“There’s been a cross-fertilisation of the industries.”

One of the reasons for this trend, Naylor adds, is the desire of financial planners to add value to their existing services.

What’s involved?

A financial planner who is considering entering the mortgage broking space will have to complete, at minimum, a Certificate IV in Financial Services (Mortgage and Finance).

Membership of the MFAA also requires completion of a Diploma of Financial Services (Finance and Mortgage Broking Management).

Professional indemnity insurance is, of course, a must. Once again, it is a requirement of MFAA membership that a member is covered for no less than $2 million for any one claim and $2 million in the aggregate and minimum run-off cover.

Brokers have to obtain accreditation with a lender, such as a bank, in order to be able to sell their loan product. Most brokers also become accredited with an aggregator, who will provide them with a panel of different lenders.

Changes to the National Consumer Credit Protection Act introduced at the start of 2011 require brokers to hold an Australian Credit Licence or be an approved representative of a licensee. Licensing is regulated by the Australian Securities and Investments Commission.

New entrants to the industry with fewer than two years’ experience must receive mentoring for two years from an experienced broker to be able to join the MFAA.

“It has been like entering a whole new industry, or rather, like entering a sub-set of the financial services industry,” says Driessen, who has completed the MFAA Diploma but has faced numerous challenges along the way.

“The major challenge has been the time [associated] with doing the training and learning,” he says.

“It’s just been about finding the time, but I did find that around the Christmas period it was a lot easier because clients were focused more on festivities.

“This transition [to providing broking services] is a logical fit to our business. People who come to financial planners pour their heart out. For a client going in to buy a house or their first investment property, we’ll be able to have a discussion on how to structure the purchase and will be able to write the loan.

“Without a financial planner who is also able to write mortgages, the client has to go around to several different places; instead, they can just come here.”

But not all agree

Some industry experts, however, question whether financial planners’ entering mortgage distribution is desirable or even viable.

Brendan O’Donnell from Liberty Financial believes such a transition is quite simply “impossible”.

“Both disciplines and both industries are looking to diversify their income, first and foremost,” he says. “On the mortgage broking side, slow credit growth teamed with borrower caution mean brokers now have to work twice as hard to generate the same level of income that they earned a few years ago.

“Equally, in terms of financial planning, with legislative changes and where the market’s at in terms of investment and the share market, it is becoming more challenging.”

O’Donnell says that while both industries should consider different ways to diversify their income stream, the convergence of the two is not something that is going to happen.

“I don’t believe there will ever be a convergence in terms of one individual providing wealth preservation and credit advice,” he says.

“Given the complexity of both industries, the products and the legislation, it would be almost impossible for one person to offer both services.”

Rather, O’Donnell believes the industry is likely to see more brokerage groups or financial planning groups hiring financial planners and brokers respectively to offer their services in-house.

“I expect to see a lot of brokerages hiring financial planners to help service and cross sell to their database,” he says.

Vicki Grey, a partner at Gadens Lawyers, however, believes “convergence is the future”.

“Convergence [between the financial planning and mortgage broking industries] absolutely will happen and has to happen,” she says.

“Either it will happen in the form of a single practitioner providing both services or more likely, at least as a first step, a firm will be able to offer both services as part of separate departments.”

Grey also believes cross-training between the industries will happen, in time, so that the challenges that come with learning a new area will be overcome.

“The laws are different and the structure of the industries is quite different,” she says. “There’s a cultural challenge to overcome, but both planners and brokers have numerical competence, they understand finance, and so whether you’re talking about one side of the balance sheet or the other, ultimately it makes sense to deal with both.”

Dacian Moses, a financial planner at Waterfall Way Associates in Coffs Harbour, tells ifa that the shift into mortgage broking is a “natural progression”.

“It wasn’t originally my intention to sell [mortgage] products but now I’m of the opinion that we should bring that in-house,” he says.

Moses isn’t able to write mortgages just yet. As a student member of the MFAA, he first needs to complete his diploma. He will then have to complete two years’ mentoring, during which time he will be able to write loans.

“The shift into mortgage broking makes sense,” he says. “When you develop a good relationship with someone, why not try and cross sell?”

“My target clients are small business owners with self-managed super funds (SMSFs), typically with a bit of debt. Being able to advise and sell mortgage products makes my service offering much more appealing.

“For my existing clients who already have mortgages, I will actually be able, on a regular basis, to compare their product with what’s in the marketplace. I could be more active in switching peoples’ mortgages from one lender to another.”

Considering other options

Unfortunately, for time-poor financial planners, becoming an accredited mortgage broker may be all just a bit too hard. Some planners already find it challenging enough to keep up with their mandatory continuing professional education requirements.

A cost-effective alternative might be to set up a referral pathway with a mortgage broking firm and to negotiate a percentage of the commission the broker earns from placing the loan.

This, according to some experts, is the future of the industry.

But according to Naylor, in some cases a referral pathway is merely a referral – with no commissions.

“The key to the referral system is that the referrer is very concerned about their brand,” he says.

“They have to make sure their client receives the same service – that’s a risk as there’s the potential for a brand to be damaged, which dampens the customer’s experience.”

O’Donnell, meanwhile, believes convergence is more about creating a “common back office”. That is, bringing experts into your business or bringing in mortgage brokers to help service and cross sell into a common client database.

Mark Haron, principal at mortgage aggregator Connective, told ifa he is seeing a shift towards more financial planners looking to provide more credit lending services within their businesses.

Aggregators set up agreements with a range of banks, non-bank lenders, credit unions and building societies, with arrangements in place for submitting applications for finance.

Independent mortgage brokers often go through aggregators as they can get a better deal for their client and get better commission for submitting the loan application.

Haron says it is best for planners who are interested in entering the mortgage broking space either to set up a referral pathway or hire an in-house broker.

“I see aggregation working best where financial planners either have their own in-house mortgage broking business or have excellent referral relationships with their own mortgage broker,” he says.

“I think that it is very difficult to do both and it is very difficult to be good at both.”

Since the industry tightened its regulatory and compliance belt, considerably more pressure has been placed on financial planners.

“Taking on broking in general means another 70 per cent extra compliance work for planners – along with professional development activities – to maintain [their] authority.

“However, financial planners who are not adding lending services to their business model are potentially putting their business at risk.”

The referral pathway, however, is not always favoured by small businesses.

Before Driessen decided to embark on training to be a mortgage broker, he did consider the referral pathway option.

“We used it with varying degrees of success,” he says. “Sometimes you get a disconnect between how you want a client looked after and the attitude of the loan writer. Some mortgage brokers are out to get the loan written regardless of structure or having a decent conversation with the client.”

Tony Bice, director of Finance Made Easy, has been a mortgage broker for the past eight years. He is also a financial planner, however, and his reason for diversifying into planning was the same reason for which financial planners are making the transition into broking.

“I could see that the only way you could really grow your business was to look for value-added products that you could run off the back of your business,” he says.

Bice agrees there are pitfalls to forming a referral pathway with another business: “The downside of aligning myself with a financial planner is that at some stage in the future, the scales may become a little tipped in one person’s favour,” he says.

“You may find yourself providing a lot of [business] to the financial planner, but you may not be getting many mortgages back the other way. You may find that the splits you’ve got mean the amount of business that you’re actually generated means you’re giving away a lot of the farm.

“I took the approach that I’d rather be independent and be responsible for my own ship and reap the rewards myself. It has caused me a lot of heartburn, a lot of frustration and I’ve hit plenty of brick walls, but that said, I don’t think there’s any better way to get a financial planning client than to run off the back of a mortgage.”

Commissions – what commissions?

Financial planners are bracing themselves for the wave of legislative changes that will hit the industry in coming months. One of the most significant changes will be the ban on commissions in relation to the distribution of and advice on retail investment products, including managed investments, superannuation and margin loans.

But while commission within some areas of financial planning is to be scrapped, commission-based loan writing remains the norm for brokers, although there are several structures within which the commission and subsequent trail payments can be made.

Driessen is looking forward to writing his first loan although he hasn’t yet finalised his pay structure.

He is considering a fee-for-advice model, similar to the one he uses for his financial planning services, although he knows fee for advice is a contentious issue that currently divides the broking community.

“We don’t take commissions [for our financial planning services], but we know mortgage broking is different,” he says.

“Potentially, there’s two ways we could do it: one tied into commissions for the value of the loan, or provide fee-for-advice. There’s a conflict of interest in terms of commissions and I am very conscious with that in practice. It’s best to give [paid-for] advice – conflict-free.”

Future of the two industries

Both financial planning and broking are undergoing significant change, with many adamant that convergence of the two is inevitable and something that cannot be ignored.

But while planners have been presented with an opportunity to grow their businesses, Moses has a word of warning: “Planners need to remember that they can’t do everything – you need to keep your real world skills up to date.”

Planners must think about what is best for themselves and their business. Whether it be creating a referral pathway with a broking firm, hiring a mortgage broker, or becoming a qualified broker themselves, they need to consider the challenges and pros and cons of each option carefully.

As the MFAA’s Naylor puts it, “It is really up to the individual and what suits them best.”