Time to diversify the pie

To diversify or specialise is a conundrum faced by many brokers, however Westpac's decision to slash commissions and the possibility other major lenders could follow suit has underlined the importance of fostering a more diverse income stream. Australian Broker's Kate Carr looks at the ways brokers are adapting to the changed lending environment by taking on new roles and offering a wider range of products

Diversify or die?

According to Michelle King, managing director Solution4, a company which provides IT solutions for mortgage and financial advisers, brokers who fail to diversify risk being left behind.

"There is always a risk that if you don't provide a full service, the client will use a broker that does," she says.

"It's very much like saying am I going to use a broker who offers me five mortgage products, or a broker who can offer me 20 mortgage products.

"If I can go to a broker who can offer me 20, I get to do one appointment and assess all of my needs."

King, who used to be based in the UK, said its more regulated market had forced brokers to explore different product offerings, particularly insurance.

"If you go to both the Canada and UK markets, which are both regulated markets, the broker take responsibility for ensuring the clients have adequate protection in place," she explains.

"So [they are] selling the life insurance and the general insurance products associated with a mortgage."

Brokers have been compelled to offer a greater range of products due to the nature of the regulation in the UK which requires them to provide the 'best advice' to clients, King notes. This means the broker has to ensure the person taking out the mortgage has adequate insurance protection in place in the case of injury or death.

The fact brokers are required to ask this question of clients has opened the door to them taking on the provision of insurance themselves, a scenario which is not as common in Australia where brokers are more likely to refer the client on to someone else who will arrange the insurance.

However, according to King this is all set to change once Australia's market becomes regulated.

"When regulation comes out [brokers] will have to ask [about insurance]," she notes. Once they start doing that, King claims it is only a matter of time before they begin asking themselves: 'Why am I passing this referral to someone else and splitting the commission when I could be earning it all myself?'

"The Australian broker market is certainly moving toward selling protection products," she says.

"It's all in the right direction, at the moment it's all very much toward referrals, but the revenues from actually doing the business yourself is a lot stronger than passing on a referral."

And given the threat to commissions any extra revenue becomes increasingly important.

"Selling protection products is something that will diversify [brokers'] income and it's good for them, they need to do that because obviously there are going to be further reductions on the commission fees."

On top of that, King points out that there are also economic changes to keep in mind which meant that not only will commissions drop but business will continue to be tougher to get.

Brokers could also look at selling other types of insurance, King says, such as trauma illness insurance, accident, sickness and redundancy insurance as well as building contents insurance and life insurance.

"The UK brokers even take it a step further and they sell pet insurance and car insurance," she notes.

In addition to insurance, King also recommends brokers forge a relationship with a financial planner.

"A financial planner can do a mortgage, a mortgage broker cannot do financial planning. So rather than losing risk losing your client to a financial planner who offers a comprehensive service for all areas, the mortgage broker really needs to form a relationship with a financial planner so they can pass through the financial planning needs, but not risk losing their client," she notes.

"Now if they pass a referral fee to the financial planner again there should be a referral introduction fee."

Some Aussie frontrunners

Although perhaps not quite ready to offer pet insurance, director of Urbantech Group, Sam Cocks, has already launched his company into the more conventional insurance game.

Based in South Australia, Urbantech has three arms offering clients a diverse range of services including finance, insurance, sourcing investment properties as well as advice on investing in managed funds.

According to Cocks, diversification is critical given current market conditions. "I think it's absolutely crucial from a couple of perspectives," he says.

"Obviously you can offer a better range of services to your clients, a more complete range of services which is going to help with client retention [and] referrals.

"...In the current climate of banks talking about cutting up fronts and trails, I think brokers need to look at additional income sources."

"We provide our clients with general insurance and also personal insurance." This Urbantech does via a system which includes three months of free mortgage insurance with every loan.

According to Cocks, once the three months are up approximately 50% of his clients continue on with the insurance product.

Urbantech has also branched into investment product advice.

"One of our brokers has got her PS146 qualifications (this allows them to provide financial product advice to retail clients), and again through another company we can provide investment product advice and clients have the opportunity to invest in a range of income producing funds," Cocks explains.

In addition Urbantech is currently in the process of offering clients the opportunity to invest in property, with the company testing out a direct property investment service.

"We have an investment property website, so clients are able to go to this website and look at a range of investment properties and if they did see a property which works for them... then go ahead and purchase.

"We earn a commission from that too," he said.

Another company which has jumped in the deep-end and embraced direct property sales is The Property Source Group.

Based in Wollongong, the group has two arms offering real estate and finance-related services.

Managing director John Carrasco tells AB, his firm is able to offer services ranging from equipment finance to direct property sales to insurance products.

"I worked in a number of major banks in senior positions for 26 years before embarking on my own," Carrasco notes.

"It was apparent that the majority of brokers were either home based or specialized just in home loans. There was a gap in the market and we picked our market segment."

Carrasco said the current period contained a number of threats for brokers, with real estate agents encroaching on their territory, as well as commission cuts making life more and more difficult.

"Most brokers sell home loans only and their incomes are based on this source only," he notes. By moving into selling property as well as arranging finance a broker can earn vastly more, he says.

"Six months ago 80% of all my income was coming from finance and 20% the rest. Now it is 80% in property and 20% the rest including finance," he says.

According to Carrasco, the model has proven popular with brokers with many approaching his firm to get involved.

"It is a no-brainer for [brokers] and also a value add to their existing clientele," he says.

The right equipment

While branching into new areas is important, integrating new products into your existing systems is also crucial to achieving success, King says.

"It comes down to how easy it is," she notes.

"If you do a mortgage appointment and it takes you an hour and a half you don't want to spend another hour with a client selling life insurance."

"If the brokers are going to diversify and sell additional products, they need to have the right IT structure in place to make sure that the process is not drawn out for the client and you can provide an end to end service within the same time scale."

All this may seem a bit daunting for a broker unfamiliar with the insurance arena. But according to King, small steps like approaching your aggregator about what insurance products they offer can help get the ball rolling.

"If I was a broker I'd be asking the aggregator group about what panel of protection providers they are looking at putting into place," she notes.

From there brokers can begin familiarising themselves with insurance by making referrals, using the knowledge gain to eventually deal with the process themselves.

She noted that one thing brokerages needed to be particularly aware of is the ease with which clients can shift their insurance polices from one provider to another, and the consequent risk of clawbacks.

"If a broker sells a lot of life insurance it's paid on what is called an indemnity term, which is just like a upfront," she explains.

"You get the commission upfront, but if the policy cancels in the clawback period obviously the commission will be clawed back."

In this instance the original broker company is responsible for the clawback, and the cost can be considerable.

"The financial impact of indemnity clawback on life insurance can send a business into bankruptcy," King warns, adding there is software available which can calculate the potential clawback risk and pay brokers on financing rather than indemnity terms.

However, despite teething problems and new risks, both Carrasco and Cocks are adamant the advantages of diversification far outweigh the costs.

"[Diversification] is just becoming more and more prevalent in the industry - all these additional services - so if you are not providing them then you are not going to be as good as your competitors," Cocks maintains.

"Even new people starting out, it is even better for them because they can start introducing these services as part of the process and it is just something that feels natural to them."