Building a brokerage - The Adviser (3 Feb, 2012)
The right structure, recruitment strategy and cutting-edge technology can add millions of dollars to the final price tag of a broker's business.
The contrast between Australia's top brokers and those who tread water has never been greater.
In an increasingly polarised market, it is clear that their strategic planning, business habits and client approach have paid dividends for some, while others seem to struggle to make ends meet.
There was a time when a broker could open for business, take a walk down the high street, knock on the door of every real estate and tax agent and then watch the leads roll in.
Such were the opportunities in the pioneering days of the 90s, when the banks were winning few friends among borrowers and brokers were a brave new breed offering a radical alternative.
The beauty of being in the right place at the right time is that there are acres of margin for error. Brokers back then had little real competition, referral partners were plentiful, and commissions were generous - and there was a largely buoyant property market to boot.
But the golden days were never going to last. While the older generation of brokers had time to get their house in order, today's protagonist does not have that luxury.
Successful businesses are generally built by design rather than by accident and a brokerage is no exception. It is no coincidence that some of today's most successful broking businesses are the product of considerable strategic planning and a disciplined approach to achieving growth.
New entrants to the mortgage broking industry are certainly not attracted by the allure of easy money; they have made a measured decision that a broking business offers a better long-term opportunity when compared to businesses in other areas.
Central to gaining a competitive edge in business is having a clear vision of the long-term goals - the ultimate value of the business or a succession plan.
Many brokers are keen to build their brokerages to the point at which they know the return, if they choose to sell, will be favourable.
But what do they have to do to ensure they get the biggest bang for their buck? How can they increase the value of their loan book, generate greater revenue from the client pool and ultimately boost the size of the nest egg they are nurturing?
The Adviser asks some of Australia's leading brokers how they have gone about building a successful business in this ever-changing market. What business strategies are they employing, and what impact do they have on the bottom line?
The early years
Talk to any aggregator or major brokerage head about the opportunities available to most brokers to grow their businesses and the term diversification is certain to come up.
But while the major players are pushing this approach hard, it is still taking time for many brokers to take the plunge.
Finance Made Easy director Tony Bice is one broker who has moved decisively into new areas of opportunity, and with profound results.
Today, Mr Bice writes between $40 million and $50 million in insurance each year and up to $7 million in commercial mortgages and equipment and leasing finance.
Add to that the $45 million he writes each year in residential mortgages and Mr Bice is settling more than $100 million in volumes each and every year.
And while he is the first to admit that integrating a new financial service into the business is difficult, the rewards far outweigh the effort required.
"In this game, diversification is the key to survival," he says.
"I decided four years ago to get into financial planning as I saw that as a perfect fit when providing mortgage finance to clients - it's a no brainer.
"Sure, it was difficult to work out how to integrate a new business area when starting out as you're heading into uncharted waters, but once I made the decision, undertook the required studies and got my qualifications, things started to crystallise."
Mr Bice says the key to integrating anything new into a business is to seek the advice of others.
"I spent a lot of time talking to experienced financial planners as well as to my dealership group to get ideas as to how best to implement the financial planning processes into my existing mortgage broking business.
"But, it's like anything: you try new things and some work, while some don't. You learn from what works and take small steps to fine tune your service proposition."
Now a strong advocate of diversification, Mr Bice says brokers who are serious about building their business must diversify.
"If you are to survive in this game you have to provide a better service offering - it sets you apart from your competitors," he says.
"If you were a client, would you seek the advice of a professional who can get you a home loan, or a professional who not only can get you a home loan but also look after your risk insurance to protect your asset and income and family, provide you with advice on your superannuation and investment strategies - and throw in a free RP data property report?"
Diversification hasn't only helped Mr Bice differentiate his business from his competitors; it has also helped him increase its value.
Generally speaking, a mono-line business is worth anywhere between 1.2 and 1.8 times a broker's recurring trail.
However, businesses that diversify can earn up to 3.5 times recurring trail, according to Vow Financial's Tim Brown.
"Those that integrate general insurance, risk insurance or property management into their business can be assured of earning higher multiples," Mr Brown says.
Financial planners are attracted to books that earn good revenue from insurance and property management. Not only can these clients be cross-sold to, but they are also likely to need or require the skills of a planner.
Mortgage Choice's Ben Herden says his 18-month business goal is to integrate property management into the company.
Mr Herden says he has long seen merit in diversification, which is why he plans to use cross-selling techniques to boost his volumes to approximately $8 million per month - a major increase from the $6 million that the Gymea-based brokerage currently writes.
Property management would give the business a rent role with a value of its own, plus a pool of investor clients that could potentially be offered a host of other services.
"My ultimate business goal is to build a business which isn't reliant on me being in the office and writing the majority of the loans," he says.
"All loan writers currently have a Buyer's Agent licence and we will continue to add further value to our clients' experiences by, for example, having a more hands on approach to assisting with investment property purchases."
Recruiting for growth
Of course, diversification is not the only method Australia's top brokers are using to grow their businesses.
FYI Group directors Sam Ayliffe and Ben White are strong advocates of driving organic growth through recruitment.
"Since NCCP came into play, we have had to employ an additional administrative staff just to cope with the surge in paperwork," Mr Ayliffe says.
However, he adds that he and Mr White are happy to recruit loan writers or administrative staff as often as the business needs them.
The key to building a strong brokerage is to feed money back into the business whenever and wherever possible, he says.
"To run a successful business, you have to be prepared to put your money where your mouth is.
"A business will never grow if you are not feeding resources into it. The more money you inject into the business, the more likely it will be to grow. You just need to make sure the money you inject is invested wisely," he says.
Recruitment is a strategy at the heart of the Australian Lending & Investment Centre's growth plans, according to directors Mark Davis and Kevin Agent.
The two believe that recruitment can make or break a company. Hiring the right people can help the company grow quickly and easily, says Mr Davis.
Despite having only been in the business for just over two years, the brokerage is already regarded as one of the best in the country, settling close to half a billion dollars in the first year.
Mark Davis alone settled more than $174 million in residential mortgages in 2010/2011.
"We wouldn't be where we are today without good staff," he says. "The first two years we were in business, we concentrated on hiring the right administration team.
"The team we have can turn loans around incredibly quickly and they have excellent customer relation skills. They are the reason our clients are so sticky."
Mr Davis says he recognises the hard work and long hours that the team puts in, which is why their remuneration packages are well above board.
"We pay them $60,000 to $80,000 a year," he says. "For that, we expect a lot from them and they constantly deliver.
"You have to be prepared to spend money on good staff and on the business if you want to grow."
Over the next two years, the company will concentrate on hiring additional loan writers," he says.
"We have bullish growth plans. We want to settle $1 billion every year within five years and we know to do that we need good staff, which is why we do not shy away from recruiting."
SEO or word of mouth
While some brokerages are focused on building their ranks, others are looking to opportunities generated by social media as well as a raft of channels across the web.
Today's borrower is more financially savvy than ever before. They have a wealth of information at their fingertips and they aren't afraid to access it.
They are using Facebook, Google and YouTube, to name but a few, to learn about everything from interest rates to rental yields and mortgage product features.
This represents an opportunity for brokers to connect with prospective clients long before the phone rings.
Brokers who are looking to build a business that either will be an attractive saleable asset or one that has the infrastructure that can easily be transferred to someone else's management need to connect effectively with potential clients when they are at the research phase.
Finance Made Easy's Tony Bice is well aware of this.
"The hardest part about growing a brokerage is growing the client database," Mr Bice says.
"You can be the smartest broker in the world with all the people skills, but if you don't have a steady stream of leads coming through the door, you're sunk.
"At the end of the day, your referral partners and existing client database will only provide you with so many leads. If a broker is truly serious about growing their business, they need to develop ways of generating new leads."
Today, a majority of Mr Bice's leads come through his website. "Just yesterday afternoon, I had four leads come through my website from four different states," he says.
But you can't just buy a URL, stick up a homepage and sit back and wait for the leads to roll in, he adds: "You have to be prepared to invest in your website."
Mr Bice currently outsources the running of the site. Not only does this free him up to write more loans, but it also gives him the opportunity to utilise the skills of professional website creators - as well as people who specialise in search engine optimisation (SEO).
"It is not cheap, but it is worth it," he says. "During my time as the general manager of Lawfund, I realised you have to outsource all the key competencies. I don't know anything about SEO, so I outsource to someone who does."
Mr Bice pays $1,000 per month to the external company, and for that he is assured that his company will come up on the first page of a Google search listing.
But while some brokerages simply don't have the revenue to spend $1,000-plus each month on their website, according to Mr Bice, they don't have to.
Each year, he takes stock of his achievements over the past 12 months. If he has managed to increase his volume, he reinvests the additional money back into the business.
"I pay myself the same salary each year. Any additional money I make goes back into the business, which ultimately helps me to write more business," he says.
Connective's Mark Haron applauds Mr Bice's savvy approach to technology and says brokers should not underestimate the impact it can have on their bottom line.
According to Mr Haron, brokers with a steady stream of leads and a robust CRM system will find their business is worth more when it's time to sell.
Businesses looking to acquire loan books will look for books that have the potential to "significantly add to their current income streams", he says.
"If you have a clean database of clients and can show you have a steady stream of new clients coming through the door, a business will be willing to pay more than the going rate.
"The more clients a broker has, the more business opportunities and prospective clients there are for the acquiring business.
"If you are constantly marketing to the same clients, rather than acquiring new ones, your business value will be significantly limited."
The difference that the efficient organisation of client data and the right CRM system can make for the ultimate value of a business is significant.
Mr Haron believes businesses with a limited client database and haphazard CRM and lead generation systems can expect to on-sell their business for approximately 1.8 times recurring trail.
However, businesses that can demonstrate there is a steady stream of new clients coming through the door will be able to attract more than three times recurring trail.
Organic for some, acquisition for others
Brokerages in growth phase may themselves turn to acquisition and the same rules apply.
Businesses that have good systems and lead generation techniques in place are attractive as the cleaner the loan book, the easier it will be to integrate into an existing business.
As such, brokers in the market to buy trail books need to make sure not only that the business has good technology and software tools, but also that it has no arrears problems lurking in the background.
FYI Group is currently doing exactly that, says Ben White.
"Our aim has always been to achieve steady growth in three key areas of FYI - finance, property and financial planning," he says. "We are always looking for brokers and other small brokerages that need to go to the next step and would like to be able to offer and be remunerated for the extra services that FYI can provide.
Mr White is not alone in his views. While Mortgage Choice's Ben Herden has managed to grow his franchise organically until now, he says he is always interested in buying solid, clean loan books as a way to quickly build the business and to capitalise on untapped opportunities.
At present, he estimates his business would be worth approximately $1.1 million to $1.4 million - not bad considering the Mortgage Choice franchise fee was less than $40,000.
Despite this, Mr Herden says he has no plans to sell the business in the short term. "My business is worth more to me as a going concern and it is worth more every month, so I will most definitely continue to build the business," he says. "It is conceivable that I will sell the brokerage closer to retirement age - but that's 27 years away yet!"
Selling the business
While Mr Herden's business remains firmly in growth phase, others may be eying the time when they step away from broking once and for all.
The options at that stage are relatively clear: either sell the business for a capital gain, or train staff and put in place a succession plan.
Mr Bice is currently contemplating precisely that.
"I plan to leave the industry in about 10 years and I haven't yet decided what I will do with the business," he says.
While he may look to sell to a bank, mortgage originator or financial planning group, the other option - and perhaps the better of the two - would be to employ a younger manager to take over his role.
Many brokers find themselves in this position. After years of hard work, it can be difficult to sell the business they have dedicated their lives to building.
But at the end of the day, when you have built an asset capable of generating a passive salary under the stewardship of an employed manager, or of delivering a handsome nest egg, the 'agony' of choice can actually be a pleasant experience.