Leap of Faith - The Adviser (14 September 2012)
The stakes are high for aggregators looking to recruit members, with new research revealing a majority of brokers will "review" their contract within the next 12 months. In an industry first, The Adviser surveyed the industry to reveal what drives the choices brokers make when deciding which aggregators to join
COMPETITION BETWEEN Australia's aggregators is running hot.
With a lack of new recruits to the industry, aggregators are being forced to take extreme measures to retain critical mass - in many instances, poaching brokers from the competition via slick sales proposals and promises of bottom line benefits.
Many brokers are reacting favourably to these pitches, while according to a new survey conducted by The Adviser, more than 40 per cent of brokers are planning to review their current aggregation agreement or contract in the next 12 months.
The Adviser's inaugural Switching Aggregators Survey, conducted online over a two-week period, found 44.8 per cent of brokers who responded would take this step - which could be the precursor to making a switch.
Just over 39 per cent said they would stay put - at least, for the next 12 months - while the remaining 16 per cent were unsure.
Perhaps of even greater interest, of the 400 survey respondents, more than 70 per cent said they had been approached by another aggregation group within the past 12 months.
AFG's NSW state manager Chris Slater, however, says these results are "hardly surprising" since the aggregation space is more competitive now than ever before as groups look to increase the scale of their businesses.
"We have definitely seen the aggregation space heat up," Mr Slater says.
"I think we can attribute the increase in competition to a combination of things, including the GFC and the 30 per cent commission cuts. Brokers are looking to see what else is out there. They are serious about growing their business and know they have to have the support of a good aggregation group to do this."
Indeed, many brokers say they would switch aggregators if it meant they would receive greater business support.
According to the survey, more than 70 per cent of brokers believe "business support" is "important" to the continuing success of their business.
Business support, however, is just one factor among many that brokers weigh up when considering whether to stay with their current aggregator or look further afield.
Software, commission structures, the ability to take trail and compliance are also key considerations and this was revealed in The Adviser's survey.
So, why exactly would a broker switch aggregators?
Increased costs due to the introduction of licensing and new compliance requirements, reduced commissions, a shift from transactional to advice-based broking, and greater pressure to cross sell have each - in their own way - contributed to a tougher, more competitive broker market.
Brokers need to be more aggressive and more strategic in the way they operate if they are to survive.
That means working with an aggregator that suits their business model and gives them a competitive edge - and switching aggregators if their current one does not fit the bill.
Davlin Finance Group's David Linco did just that, switching aggregation groups half-way through last year in order to give his business the "best chance for success".
Mr Linco believes his previous aggregator was not giving him the support he needed to advance his business to a level that would include a diversified service offering.
"Commission cuts, combined with the soft property market, meant my mortgage business was no longer as profitable as it once was," Mr Linco says. "As such, I knew I needed to change some things and really look at diversifying my core offering away from just mortgages - but I felt as though my aggregator couldn't provide me with the support, guidance and business assistance I needed.
"To them, I was a small fish in a big pond.
"At the end of the day, I am a small business owner and I have to look out for my own business interests first, which is why I switched."
Mr Linco built a business plan listing his medium- to long-term goals which he then took to several aggregators, intending to find one that could help him achieve his goals within the time he had allotted himself.
In this he was not alone.
According to the Switching Aggregators Survey, almost 50 per cent of brokers would approach three or more aggregators if they were to decide to switch.
Just 11.2 per cent said they would approach only one, while 39 per cent said they would approach two aggregation groups.
Vow's chief executive, Tim Brown, says it makes "business sense" to approach more than one aggregation group.
"Switching aggregators is a big decision and one that should not be made lightly," Mr Brown says. "It is imperative for all brokers looking to switch to do their due diligence.
"Have a chat with the various aggregation heads and find out what they can do for you and your business. If you are looking for more business support than you are currently receiving, you need to make sure the aggregator you join can provide you with the support and service you need."
It often pays to talk with other brokers who have just made the switch, so as to get their thoughts on the matter.
"Your peers will be transparent," Mr Brown says. "They are not going to beat around the bush and tell you what they think you want to hear. They are going to be honest and when you are making a decision like this, honesty is the most important thing."
Mr Linco did just that. "It was important for me to have conversations with brokers who were in a similar position to myself," he says. "I wanted greater support, so I needed to find some brokers who wanted the same thing from their new aggregator and hear their feedback on whether or not switching had helped them to achieve that."
While Mr Linco chose to look further afield to get greater business support so he could build a diversified financial services hub, there are many other reasons why brokers seek a new aggregation partner.
According to the Switching Aggregators Survey, the number one reason for switching is poor software or technology.
Of the 400 survey respondents, 24.8 per cent said they would leave their current aggregator if it meant they could have access to a better software platform elsewhere.
Commission structure was the second most popular reason. More than 23 per cent said they would leave their aggregator and partner with someone else in a bid to retain a greater percentage of their upfront and trail commission.
GREATER COMMISSION ANYONE?
Progressive Financial's Vass Mafilas says commission played a significant role in his decision to switch aggregators.
Mr Mafilas says that under his old contract he was entitled to 80 per cent of his upfront commission.
"Now, that's not bad, but it's not great," he says. "I am happy to pay a greater portion of my commission to my aggregator if it means I will receive more business support, but I wasn't receiving the level of support I wanted and I was paying more for that privilege."
Mr Mafilas therefore chose to move to a new aggregation group which now pays him 92.5 per cent of his upfront commission and 100 per cent of his trail.
"It just made economic and business sense to make the switch," he says. "My current aggregator makes it easy for me to grow my business and hit all of my goals."
In fact, National Mortgage Brokers' chief executive Gerald Foley says he is shocked more brokers don't switch to secure greater commissions.
"There are definitely some brokers out there that are focused on building a business and realise that to do that they probably need to pay a little more to their aggregator in order to receive greater business support," Mr Foley says.
"However, there are also plenty of brokers who are simply concentrating on being a broker, writing loans and getting the greatest dollar from every loan written."
According to Mr Foley, a "significant portion" of brokers are 'dollar chasers' who want to make a good buck out of the industry and are therefore less interested in building a business.
"There is nothing wrong with wanting to make a buck," he says. "In many ways, this industry was born from people looking to make a good dollar. They were thinking about the now, rather than the tomorrow."
FLAT FEE THE FAVOURITE
According to The Adviser's survey, there are still plenty of brokers out there who think in this way.
When asked which business model they would choose if they were to switch aggregators, an overwhelming majority opted for the 'flat fee' business model.
A significant 55.3 per cent of respondents nominated flat fee, while 36.8 per cent said they would choose the 'commission split' model. The remainder said they would be inclined to join a branded group/franchise.
The monthly fee-based aggregation model has a long history and is well established within the industry, with some of the biggest players - notably Connective and FAST - offering fee-based agreements to their members.
FAST launched its monthly fee model in 2000, responding to the establishment of a more experienced segment of the broking market and as an alternative to the commission split arrangement.
The model proved to be highly successful, and FAST quickly saw the group's number of broker partners grow. FAST now has more than 1,500 brokers on its books.
Connective, which began operating in 2003, now counts 1,600 brokers as members.
According to Connective's principal, Murray Lees, brokers best suited to a fee-based model are generally the more experienced ones who want to run their business independently.
"For full-time brokers writing reasonable amounts of loans, the dollar figure benefits will be obvious," Mr Lees says.
THE TECHNOLOGY QUESTION
While commission is obviously crucial to brokers and their businesses, it is still not the number one reason they look to switch aggregators, according to the survey.
Almost 25 per cent of brokers said they would leave their current aggregator if they provided poor software or technology.
A further 70.7 per cent of brokers listed software and technology as "very important" in the decision to switch or join another aggregator.
Connective principal Mark Haron says these results are largely unsurprising given the evolution of the industry and the more stringent record keeping that brokers are now required to do.
Under the National Consumer Credit Protection Act (NCCP), brokers need to document a lot more of their processes and to keep digital records of many aspects of their relationships with their clients.
They must prove they have done their due diligence and offered clients a range of "not unsuitable" products.
In addition, there is a range of "compliance documents" that brokers are required in fill out for each and every client.
This additional paperwork has been labelled a burden by many brokers, and in fact, according to a recent straw poll conducted by The Adviser, 71.3 per cent of brokers believe NCCP has "negatively" impacted their businesses.
NCCP, according to some, has added up to four hours to each loan application.
However, according to Mr Haron, brokers who are finding compliance to be a "significant" burden on their time are simply not using the right software.
"A good software platform can help brokers with their compliance and significantly reduce the time it takes to write each loan," he says.
"I think, if you look at the results of the survey, this is something brokers are starting to understand. That is why so many would be happy to switch aggregators if it means they will have access to better software.
"Brokers want to be productive and they want a good electronic lodgement capacity," he says. "They also want to be up-to-date on compliance. As such, it is no surprise to see so many brokers saying they would switch on the basis of technology."
Outsource Financial's Sharen Moncada says the prospect of using "simple software" was what pushed her over the line, prompting her to switch aggregators.
"I wanted an IT platform that was simple to navigate and easy to use," Ms Moncada says. "I wanted to have access to an IT platform that could be used as a CRM system as well as a rate comparison tool.
"While there were a lot of other factors at play in my decision to switch, the idea of having access to a good software system - one that was better than the one I was currently using - was too good to pass up."
STAY PUT OR MOVE ON?
While Ms Moncada is happy she switched to a new aggregator with a simple IT system, she would be the first to admit she was nervous about leaving her former aggregator.
"There was definitely a degree of anxiety," she says. "I didn't know what to expect and how much work the whole process was going to be."
Many brokers, in fact, choose not to leave their existing aggregator because they believe the switching process would be too hard.
Nevertheless, talk to almost any broker who has recently changed aggregators and they will say it was no trouble at all.
With aggregators literally falling over each other to try and poach brokers from competing brands, they are happy to take the leg work out of the switching procedure and will go to great lengths to make it as seamless as possible.
According to Mr Linco, the entire switching process took less than one month and his new aggregation partner took care of his accreditation.
"A lot of lenders do not let brokers transfer their accreditations between aggregators," he says. "When you join a new aggregation company you have to start the accreditation process all over again.
"As such, I was dreading the process and thought it could take months for all my accreditations to come through, but that wasn't the case at all. My new aggregator took care of everything for me."
Sydney-based broker George Collings had a similar positive experience, despite initial concerns that switching aggregators could take months of "fussing about" and would inhibit his productivity.
In fact, he was "pleasantly surprised".
"I got a letter of separation from my aggregator, but apart from that, the rest was handled for me," Mr Collings says. "It was a seamless procedure and a lot less painful than I had originally anticipated."
MAKING THE MOVE
Even if it appears to be the most prudent thing to do commercially, switching aggregators should not be undertaken lightly. It is crucial to take a long-term approach, weighing up the costs and benefits of remaining with a current aggregator against signing up with a new one.
Making the move could set you up for long-term success with an aggregator that can help your business flourish. On the other hand, it could be the kiss of death if the move is based on the promise of a better rate or smaller fees, but the aggregator does not have the necessary systems, support or cashflow in place.
Before knocking on any doors, it is essential to do the necessary research, due diligence and cost/benefit analysis. Think about how much the move is going to cost you in terms of time as well as in monetary costs, such as trail.
You should also thoroughly check out any aggregation groups you might have your eye on.
For example, not all aggregators will allow you to take your trail book with you if you leave, so think about how this might impact your business budget down the track.
Will they let you have multiple aggregator agreements/contracts at once? Will they let you keep your trail book if you choose to leave subsequently? What do the aggregator's financials look like?
"In today's market, I think it is more important than ever for brokers to associate themselves with a financially strong group," says AFG's Chris Slater
"The brokers joining us at the moment continue to tell us they are looking for transparency. There is some concern among brokers that other aggregation groups are not highly profitable. Brokers want to join a group they can trust. They want a business partner that can and will support them, not just now but over the medium- to long-term as well."
Brokers should be wary of any aggregator that does not wish to make their financials clear to potential new recruits, Mr Slater adds.
"All brokers need to complete a thorough background check on their aggregator," he says. "Check the company's financial statements to see how the business is travelling; have a good look at the lender agreement; and look closely at the aggregator's PI insurance.
"Some aggregators will not be willing to provide their financials; this should raise a red flag. Choose to partner with an aggregator that is transparent and has strong IT and support platforms - as well as clear broker and lender agreements."
PLAN's chief executive, Trevor Scott, believes brokers who do not partner with a financially sound aggregator will find themselves in hot water.
"In today's market, the only way to survive is if you have critical mass," he says. "The big will get bigger and the small players will be squeezed so tight that they will be forced to sell or shut their doors."
Acquisitions like the one recently finalised between NMB and Aussie will become more commonplace in the future, he adds.
"The face of aggregation is always changing," Mr Scott concludes, "and I think it will continue to evolve."