The case for the insurance brokerage business model

As young agents feel short-changed and broker-owners lament profit margins, could adopting the insurance brokerage model be the happy medium?

“The biggest mistake mortgage brokers made was copying the real estate brokerage model instead of the insurance model—mortgage and real estate brokerages collect cheques and disperse slightly smaller cheques,” said Gordon McCallum, founder, president and CEO of Edmonton-based First Foundation. “Every insurance brokerage aims for a three-way split: A third goes to broker compensation, a third goes to overhead and a third goes to profit.

“The margins are terrible in this business because it isn’t run like a real business.”

Mortgage agents enjoy generous commission splits, the remainder of which is too paltry to invest in their training and marketing, added McCallum.

“As mortgage brokerages, we give away 90-95% of the commission before we even incur expenses, and then agents expect software investments, marketing investments, training, compliance and payroll. That’s coming off the 5% or 10% we have left as a brokerage. Our gross margins are out of whack and so poor to start, and that’s why you see so much consolidation now. The only way the economics work is if you scale massively.”

First Foundation and a number of other brokerages instead have agents on salaries, and while the company will bear most of the risk, the costs are fixed and the upside lofty.

“If you were to pay somebody, for example, $60,000 a year full-time and they were able to push $18 million of funding, the commission on that will be roughly three times their salary, so they contribute to the organization’s bottom line. The company takes some risk on that salary, but also takes care of marketing expenses, pays benefits, vacation time and develops structure around their agents.”

Operating a brokerage in smaller markets is especially onerous because there are fewer originations, and the solution often requires more entrepreneurial zest.

“I’m in Midland, Ontario, and our average mortgage amount was $248,000, so we don’t have the volume to satisfy every lender. It’s not a big problem with Centum because we can use their funding desk, but there are a couple of lenders I’d like to sign up with but can’t because we don’t meet their minimum requirements,” said Kevin King, broker-owner of Centum King Mortgages Inc.

“I have conquered our little area, to speak, but I have to venture outside our area and grow my brokerage. That’s the focus right now—we’re looking at Barrie and Wasaga Beach.”

Until the mortgage brokerage model evolves, tyro agents might find it in their best interest to sacrifice some commission in exchange for the building blocks of their futures. McCallum says most agents excel at either finding business or putting deals together—but seldom both.

“Organizationally, we’re letting those people down because there are some really good people in those two buckets,” he said. “A common complaint I hear when I speak to new agents is they never got the training and support they were promised, yet their primary motivation is their split. They have to take responsibility here—I’m not putting it all on brokerage owners. The market is what it is and people want big commissions.”