The Great 5 Myths of Mortgage and Finance Aggregation - Aggregator for Professional Mortgage and Home Loan Brokers and Groups - Vow Financial

The 5 Great Myths of Mortgage Aggregation

As the mortgage broking industry continues its chaotic and unstoppable march toward maturity, it's time that the myths of aggregation are exposed.

First though, how does one clearly define the business that is aggregation and the groups who participate behind its facade? The term 'aggregator' was first used by the industry in the early years to describe a number of businesses that evolved, or by intention formed, a network of independent mortgage brokers who through the action of bulking loan volume, were able to negotiate better lender commission terms.

Today, the word 'aggregation' is simply too loose a word to describe the collective mish-mash of competing ideologies and business structures that exist on the back of mortgage broker networks. For example, there are businesses that operate solely from a wholesale perspective, yet others that compete with their own broker network at a retail level. Some structures offer full service and others little or no service... and still others don't know what they are, so offer both. There are those that are national and those that aren't... and there are those that once operated as a single retail branded entity, that now (in addition) champion an independently branded arm, i.e., a wholesale aggregation business. No wonder there's confusion about aggregation and what it is or should be. The proliferation of these businesses has muddied the waters and made the task of comprehending the business that is aggregation difficult. Further, many businesses operating within the 'aggregation' space have grown so quickly that they themselves do not fully understand their own purpose, business or customer. So what exactly is the business of aggregation? What is its purpose? What support and what services should it provide? What should it cost? Does it guarantee the safety of trail commission? Is it better to be with a larger group?

While the term "aggregation" has stuck, many of the businesses that lead broker networks today offer much more than a bulking arrangement. As such, a more appropriate term to describe these full service aggregators would be Dealer Groups. It is important to delineate the differences between the two as there are still businesses jumping into the aggregation space - many of which will fail to provide mortgage brokers with the level of support and services that are required by an industry that's demanding greater professional standards. Thus, the industry should call a spade a spade and define 'aggregators' as businesses that exist largely through the action of bulking alone... and 'dealer groups' as those businesses that provide comprehensive support and a broad collection of services.

The business that was aggregation has evolved. Broker groups who refuse and/or fail to invest time and money in support and services will lose the backing of not only their member base, but also of industry, while the dealer group of today will have to re-engineer new ways of doing business and deliver services that give strength, efficiency and stability to their broker members if they are to remain relevant tomorrow.

MYTH #1 - "I don't need the support or services of a mortgage aggregator"


A fair remark five years ago... after all it was arguable as to whether a professional independent mortgage broking business had anything to gain from an aggregator who charged a hefty fee for a crude value proposition.

At the time, the sales pitch from the aggregator was convincing and commonly scripted around two statements like - "benefit from our group buying power" and "you won't survive unless you're with a larger group". Persuaded by the half truths and fear propaganda, large numbers of mortgage brokers subscribed to aggregators - agreeing to pay tens of thousands (and in many cases hundreds of thousands) of dollars per year for what was little more than an unreliable commission distribution service and a commission split with their aggregator that often voided any benefit of so called group buying power.

As a result, it's not surprising that today; there are a good number of experienced and sophisticated mortgage broking professionals who are mindful and/or deeply resentful of aggregators and as a consequence, question the value of working with an aggregator. There is no question that the aggregators of today have not clearly articulated their value proposition. The question of whether mortgage broking professionals require the support and services of an aggregator needs further exploration. Most of the early aggregation groups offered little or no service - their main thrust was to administer commission and with little to no regulation or professional standard requirements, they had little incentive to value-add.

Today however, the environment is different. The rules of the game have changed and to play, to compete... to win, mortgage brokers need to employ the armor that is available from a professional dealer group. At the same time, mortgage brokers must ensure that they get 'bang for buck' value such as, but not limited to: access to regular professional development events at no cost, compliance support, nationally recognised training and education, full accreditation services, secure and smart software including real CRM capability, marketing, website and lead generation tools, deal scenario assistance, on-time and accurate commission management and access to management. Of course, all this needs to backed by competitive pricing and a genuine desire by the dealer group to work with each broker principal in the support and promotion of their business goals.

In practice no trading entity stands independent, i.e., all entities are inter-dependent. The real question is: "what is the core business of each player in the third party channel?" A lender's core business is lending. A mortgage brokers' core business is broking, (which is fundamentally consumer focused). A dealer groups' core business is business infrastructure support and professional services.

Small to medium sized mortgage broking businesses will find it increasingly difficult to compete in the mortgage broking industry, unless they leverage from the services and support of a professional dealer group.

MYTH #2 - "A 100/100 broker commission deal is fairer"


Whether it's an aggregator that confiscates 15-20% of the upfront and trail commission or one that sets an arbitrary dollar figure per deal, the important question to ask is - "what is or should be the fair cost of being a part of a professional dealer group?"

Like all businesses, professional dealer groups have fixed and variable costs, however the problem in the mortgage broking industry is that no one has been prepared to explain these costs to mortgage brokers. Hence, it's not surprising that brokers are becoming increasingly distrustful of what has become a convoluted assortment of offerings... made worse by the two-facedness of some aggregators who are clearly not sure of their own value proposition and cost of doing business.

Let's dispel the commission myths now.

CAPPED FEE DEALS, I.E., $500 P/M

These simple deals evolved from a plan to compete on price and price only - the objective being to build a large bulking network, not a service! Evidence has since proven that this strategy earns the aggregator so little revenue that it struggles to provide any genuine service, let alone a reliable commission management service. These bulkers (pure aggregators) have done nothing to advance the mortgage broking industry. In fact, the latter part of 2005 saw a number of well-known 'price only' players accept the game as being too tough (as they didn't have the sustainable capital or value proposition) and sell out. Oddly, lenders have privately stated that they do not support 'price only' players, yet many still choose to accept loans from those that remain. The old school thinking of "I just want the cheapest aggregator" may not be the smartest long term strategy!

$165 PER DEAL + $5 P/M TRAIL FEE*

Mortgage brokers need to weigh-up the real dollar cost of this deceptively cheap offer and re-evaluate a belief that the 'fee per deal' offer is better than a percentage based arrangement. Let's assume that a mortgage broker is settling 10 loans a month. The invoice from their aggregator in the 1st year will be $23,700 per year. With compound trail, the invoice will be $38,100 per year in the 3rd year and $52,500 per year in the 5th year... what's fair about that! It's a lot of money to pay for what is essentially a commission distribution service.

WARNING

Do your maths! A mortgage broker settling 10 loans p/m at an average loan size of $275,000 is really earning (on average) approximately 91.5% of both the upfront and trail commission. Based on a $400,000 average, the percentage is (on average) approximately 94.2%.

Whether it's a 'fee per deal' arrangement or a percentage split, the BIG question is: "What gives these aggregation companies the right to make compound revenue on YOUR commission year after year? Yet that's exactly the type of arrangement that thousands of mortgage brokers have signed-up for!

The big problem with this 'fee per deal' offer is that its viability is dependent upon those brokers settling (for example) more than 10 loans per month, as they are subsidising those brokers who are settling less than 10 loans per month. Adding to the problem is the fact that once consolidation kicks-in and the less professional brokers leave the market, these 'fee per deal' aggregators will be compelled to increase their fees on their remaining brokers to maintain revenue/profitability!

Lastly, it's interesting to note that there have been a number of large aggregators who have recently replicated a 'fee per deal' offer in addition to their percentage based arrangement. This is clearly an example of strategy on the run and as stated earlier, proof that they don't understand their value proposition!

80% UPFRONT & 80% TRAIL*

FACT: The 15-20% fees charged by the 'old school' players are excessive! These large players carry such large fixed costs that they're burning YOUR money... or simply lining their pockets. Either way, they're making more than a lot of money from their brokers and strangely, they're openly arrogant when defending their pricing structure. Using the same commission variables as used in the above 'fee per deal' example, but based on a 20% take, mortgage brokers will be invoiced $56,031.25 in the 1st year and a whopping $128,631.25 in the 5th year... and that's PER YEAR! Brokers contracted to these large groups should demand an explanation from their aggregator as to why they're paying so much... and be warned, brokers should ensure that they have a lawyer check their agreement before leaving.

Industry modelling suggests that the fair cost of being a part of a professional dealer group is somewhat dependant upon the level of service, support and scale of the dealer group. Generally one would expect to see professional dealer group fees range from $20,000-$40,000 per annum. Importantly, these annual dealer group fees should not increase exponentially (i.e., on the back of compounding trail) year after year! The key is to find a professional dealer group that can demonstrate equity in their pricing structure.

* Calculations assume average loan of $275,000 with commissions of 0.7% upfront and 0.275% trail

MYTH #3 - "My commissions are safe because they're transacted via a trust"


One of the biggest untruths ever perpetrated against Australia's mortgage brokers were the claims made by a number of aggregators regarding the perceived effectiveness of their commission trust structures as a vehicle for protecting payment of trail commissions to brokers. The legal fact is, commission transacted via a trust offer very little of the protection that brokers are looking for.

Incredibly, a number of aggregators continue to engage in misleading and deceptive conduct in the promotion of their commission trust schemes. As such, it is entirely likely that legal action may be taken against these particular organisations, which may destabilise their financial position and jeopardise their ability to ensure the proper delivery of services at appropriate standards to brokers, or to ensure the full payment of all broker trail commissions.

WARNING

It doesn't matter which aggregator you choose, it is a simple fact that if the aggregator breaches certain obligations in their agreement with the lender, for example: acts fraudulently or negligently or becomes insolvent, trail payments will cease.

MYTH #4 - "I'll be better off with a larger finance aggregation group"


Perception is a powerful thing and to make a decision based on it alone can cost one a lot of time and money. It's even more crucial in the mortgage broking industry today to ensure much effort is invested in choosing the right business partner. Aggregators for too long have played the 'master' role in the relationship and to this day continue with an attitude that reflects same. Those brokers who reject the lip service of these large groups and who instead invest in a relationship where the aggregator is both open and accountable will fare best in the future. Mortgage brokers should ask aggregators to tender for their business and demand that they demonstrate such things as management capability, history and forward planning, viability and scale, transparent pricing terms, technological capacity etc, etc.

Aggregators who refuse to be open and who treat questions with insincerity should not be considered. Good professional dealer groups will on the other-hand be happy to participate in this process. The bottom line is, a well organised, customer focused, financially stable professional dealer group with market leverage and a vibrant member base provides the best option available in the market today.

MYTH #5 - "All lenders are committed to professionalising the mortgage broker industry"


There was a time when having hundreds of direct agreements with mortgage broking businesses was crucial, especially when lenders were scrambling to entrench themselves in an evolving third party market.

Today, this thinking is not serving the lender and is stopping the mortgage broking industry from evolving within its natural space. It is expensive to manage hundreds of relationships and more importantly, lenders should not be in the game of micro-managing relationships with mortgage brokers...it is not their core business.

Lenders approached aggregators in a similar fashion. Get onto the panel of as many aggregators as possible to ensure market share. The question as to what type of aggregator was a good-fit was not part of the selection criteria. As such, lenders now have a plethora of agreements with a broad range so called aggregation structures, including many that aren't in synergy with their own, i.e., in the areas of quality, compliance, education and broad professionalism.

It's time that lenders stopped forming agreements with brokers and aggregators for the sake of it. The future will be partnerships with professional dealer groups who are geared and who specialise in managing relationships with mortgage brokers. In doing so, lenders must be smarter when it comes to the dealer groups that they choose to partner... maybe selecting and working with only those 30 or 50 so groups that best fit with their lending objectives.

Lastly, while lenders continue to send mixed signals to the market with direct agreements, they miss the bigger picture! Although the strategy may serve short term motives, the broader damage is confusion and division in the industry. If the mainstream (1st and 2nd tier) lenders took a more strategic and unified approach to the third party mortgage broking channel, they would not only help reform and professionalise the industry much sooner, they would also help themselves via more proficient and profitable relationships.

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