As every Australian mortgage broker knows by now, the Financial Services Royal Commission Report was handed down by Commissioner Kenneth Hayne QC on 4th February, 2019, and what followed was a flurry of anger, disbelief and navel-gazing in the broking community.
In this article we’ll track how the debate has unfolded since the Report was released, and some of the implications and action steps for brokers in a post-RC world.
Doom and Gloom?
Of key concern to brokers was recommendation 1.3 from the Royal Commission Report:
Recommendation 1.3 – Mortgage broker remuneration
The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending.
Changes in brokers’ remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders from paying other commissions to mortgage brokers.
Certainly, if these recommendations were implemented into law, the prognosis would look dim for both the broker channel and competition in the Australian home lending market.
In fact, the only winner would be the big 4 banks.
Political Responses To The Royal Commission
Prime Minister Scott Morrison and Federal Treasurer Josh Frydenberg were quick to provide reassurance to brokers that the full recommendations of the RC would likely not be adopted in full by a future Coalition government.
After initially stating that the Australian Labor Party would adopt all recommendations from the Royal Commission, shadow Finance Minister Chris Bowen later softened his party’s stance, proposing an upfront commission model capped at 1.1% of the loan value and no trail commission.
Dialogue is continuing, and the concrete is still wet.
What felt like doom and gloom a month ago now seems much more bullish for brokers and consumers.
5 Action Steps For A Post Royal Commission World
It’s possible that very little changes for brokers as the result of the Royal Commission Report.
Or, it may be that some or all of the recommendations will be adopted at some time in the future.
We really don’t know what will happen.
My position is that I still enjoy being in the mortgage broking industry, and that my future growth plan has to accommodate both the current reality, and what may (or may not) happen in future.
So here are the predictions (and associated Action Steps) that I’m currently applying in my own practice (and recommending that our Practice Accelerator coaching Members take in their practices too).
1. Make hay while the sun shines.
Even if changes to brokers’ remuneration structure are implemented, they will probably take 18 to 36 months to take effect, and be rolled out on a gradual basis.
There is ample time to focus on practice growth before anything even changes to the broker remuneration model.
So while things remain as they are, I plan to double down on growth, while planning for the future.
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2. Differentiate With Industry Focus And Service
In my own practice, the foundation of growth has been developing several Unique Value Propositions for specific client types.
Essentially this means offering a specific, tailored solution to a specific target market. By doing this, my view is that I’m more insulated from threats to the general broker market.
And, should some component of fee for service become necessary in future, being a specialist in a niche will allow for greater pricing power.
The other area of delivery where I aim to stand out is in client service and experience.
I’ve recently renewed my client welcome pack, case study brochure and other marketing collateral that we deploy in our sales process.
These tools provide a way to stand out from the crowd and remind clients of the value that we deliver as their broker.
3. Build capacity at low cost
The trend where brokers are asked to do more work for less money seems likely to continue. Compliance burdens are high already. If anything, they’re set to increase.
So brokers need to build a lean and efficient practice, using the best tools, technology and staffing approaches.
I use BrokerEngine software to streamline compliance and workflow, while providing a very thorough service to clients.
The aim is to provide clients with answers to their questions before they even knew to ask.
In addition, there are a host productivity-boosting tools that can help brokers achieve more results in fewer hours.
In addition to software and systems, my practice relies on offshore loan processing services to pump more throughput through my practice.
A good loan processor is worth their weight in gold.
Some brokers resist the temptation to build their team because “it’s quicker/simpler/cheaper to do it myself”.
In my own experience, it took some trial and error to grow a successful loan processing team, but has been the key to my practice growth.
A full time, Senior Loan Processor costs me around $2K AUD per month, with the capacity to process ~20 loans per month.
At that price, it makes sense to entrust the processing to them, while focusing on the client-facing work myself.
4. Strengthen A Proactive Service Model
There are lots of good reasons to look after your clients well.
Under the existing model, trail commission exists to incentivise brokers to provide ongoing client care.
Should trail commissions be removed (and replaced by a larger upfront commission, for example), then proactive service models will become even more important.
In a “post-trail world”, brokers may start offering fee-based premium support packages to clients (e.g. $49 per month) to provide a suite of value-added services.
I’ve already started planning fee-based care and maintenance packages.
I’ve been running a process like this for several years where I proactively review every client’s situation, based on defined trigger events, such as:
- Prior to fixed rate expiry
- Prior to IO expiry
- Periodic (e.g. every 12 months)
This allows me to provide a Refinance / Pricing / Stay Put recommendation to the client (along with an accompanying report) before the client has even thought about reviewing their lending.
Proactive client reviews are an extremely valuable retention tool — and it’s easy to see how critical a review process would become in an upfront commission only world.
5. Diversify Income Streams
For many years, my practice has been reliant on just one revenue stream: loan commissions.
While this has served me well, it does start to look like a “one legged stool” should the commission model be materially altered.
For this reason. I’ve accelerated the adoption of multiple income streams into my practice, along with systems and processes for cross-selling these in an integrated way.
These additional revenue streams include:
- Home Connection services
- Financial planning
- Life insurance
- Estate planning
- Property investment
- Property management
While I’m starting from a relatively low base, these additional revenue streams will become more significant in the years ahead, and provide a buffer against changes to the core loan commission revenue stream.
While most brokers I’ve spoken with aren’t seriously perturbed by the RC Report, I have heard a few brokers question their future in the industry and “take their foot off the gas”.
My view is that unless you shut your doors now, the best course of action is to double down your focus on service excellence and growth.
After all, your practice is like a moving vehicle. There’s no point stopping now, while momentum behind you.
If you’d like to “piggy back” on all the systems I’ve just covered, then you might consider joining 50+ fellow brokers in our Practice Accelerator, or taking a demo of the BrokerEngine software.