Point Blank: Down to diversification - The Adviser (30 Aug 2010)

Monday, 30 Aug 2010 - The Adviser

Vow Financial's chief executive officer Jeff Zulman says the industry is heading into a new era identified by legislation and diversification.

WHY DID YOU GET INVOLVED IN THE MORTGAGE BROKING INDUSTRY? When I go into any industry I look at the business from an outsider's perspective. I look for a couple of characteristics - the first being whether there is annuity income, or what I call the 'River of Gold'.

Mortgage broking, and in turn mortgage aggregation, benefits from this river of gold. If you are a successful mortgage broker or aggregator, you have a certain amount of income that you can bank on, which makes it a lot easier to plan. It gives you financial security. As an external investor, that was something that was critically important to me.

I saw an industry that was in a state of change. When times are changing, opportunities open up for both new and existing industry players to find gaps in the market and capitalise on them. I saw opportunities on the ground for a new aggregator to enter the market and compete for broker business.

To me, the single greatest thing about the mortgage industry is that it is constantly evolving - 17 years ago there was no mortgage broking industry, it was all done by the banks. Today, mortgage brokers account for 40 per cent of the industry.

YOU HAVE A WEALTH OF EXPERIENCE IN THE FINANCIAL SERVICES SECTOR. HOW DO YOU THINK YOUR PREVIOUS POSITIONS WILL CONTRIBUTE TO YOUR CURRENT ROLE?

My first job was in South Africa - where I ran my own business. I sold clothes at the market. It was here I learned how important it was to make payroll every month. I also came to learn the great satisfaction that comes from being a small business owner.

My second job was at an investment bank. I worked for Goldman Sachs in both London and New York. It was here I learned the benefits of mergers and acquisitions, and how you can add value to your business if you make the right decisions. All parties can benefit from the right merger.

Throughout my career, I have also held a series of executive positions within the financial services sector. I have been involved in helping clients start, sell and exit their businesses, so I understand the dimensions of a mortgage business, which should help me in my current role.

HOW IS VOW FINANCIAL PROGRESSING AFTER THE MERGER OF A NUMBER OF EXISTING MORTGAGE BUSINESSES?

We are five months in and doing well. We spent the first 100 days focusing on pulling the separate businesses together. Now, however, we have started to roll out various initiatives that are designed to help our broker partners.

A common complaint I have heard from brokers is that they simply do not have the time to keep up-to-date with all their administration duties. And, as most brokerages boast less than five loan writers, hiring a person that is solely responsible for administration can often appear to be a waste of money. Vow has responded by creating an administration service that brokers can outsource their admin workload to.

We will continue to broaden our services over time and give our brokers a menu of options. We don't want to create a smorgasbord that forces brokers to eat themselves to death. Instead, we want to deliver a menu that suits the broker, where they can pick and choose the options they need and require.

YOU SAID IN EARLY 2010 THAT THIS IS THE YEAR OF THE SECOND TIER LENDER. DO YOU STILL BELIEVE THAT?

The purse strings are loosening a little bit for the second tier lenders, as such, they are making up for lost ground. In addition, the second tier lenders' mindset has changed.

If I look at the work of Bankwest, Citibank and ING Direct, they are all out there, looking to ramp up their presence in the mortgage industry and improve their competitive position.

Earlier this year, AMP launched a new advertising campaign that actively encouraged borrowers to see their broker. With this in mind, I think it is fair to say that second tier lenders are starting to see mortgage brokers as a very valuable channel. In addition, I think we will start to see the majors pull back, which will serve to open the door further for second tier lenders.

THE ECONOMICS OF BEING A BROKER IS CHANGING. HOW CAN BROKERS ENSURE PROFITABILITY?

I am on record saying "diversify or die". The simple economics of it is that it will cost more money to deal with the compliance side of regulation - it is an unavoidable cost. And while compliance costs increase, revenue is sliding as lenders restructure commissions in line with market economics.

Smart brokers will understand that in order to stay afloat they will need to diversify. But diversification doesn't mean brokers will need to rush out and get a job flipping burgers - far from it.

Instead, brokers need to diversify their core value proposition. I believe mortgage brokers sit at a good crossroad.

When a buyer makes a decision to buy their home, they make the decision to buy the biggest single asset they will own. If they make the decision to buy an investment property, that is their way of putting money behind bricks and mortar. That needs to be protected, insured - that person's life and their ability to repay the loan has to be considered.

Mortgage broking is not a single transaction business. And for the brokers that recognise that, and diversify in a smart way -building expertise internally or referring to trusted partners - they will build their business and their bottom line.

As diversification takes hold, I think we will start to see a whole new breed of brokers develop over time. Mortgages make up just one small part of mortgage broking.