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Lenders are being urged by an aggregator head to consider and consult with the broker channel before changing the commission structure on asset finance loans.
The head of aggregation at asset finance group COG Aggregation has put out a call for lenders to ensure they properly consider the “economics of distribution” before making changes to commissions on asset finance loans.
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Mark Rayson, the head of COG Aggregation Services, was speaking at COG Asset Finance Broker’s Conference in Sydney on Thursday (21 March), where he delivered a session on business insights and the current environment.
Speaking to delegates – who included asset finance brokers and lenders – Rayson noted that brokers are the largest distribution network for asset finance brokers but lamented that they were being increasingly squeezed by cost pressures.
He therefore urged lenders to consider the cost burden that brokers face before they make changes to their commission structures – noting that when brokers distribute financier products, the cost of distribution (brokerage) gets added to the cost, and while paid to brokers, it is predominantly worn by the end customer.
Rayson stated: “Brokers have the hard job of finding customers and finding lenders to look after those customers. But, I just feel that over time, that the economics of their [broker] businesses gets a little bit overlooked in the value chain.
“Many lenders, decades ago, decided it was very expensive to distribute product themselves [the margins were too small] and so moved to broker channels.
“But, I think it’s important that we have a look at the cost base of brokers have so that the people making decisions around the way that they deliver products take into account what brokers have to go through and what they spend.”
The aggregator head outlined that COG Aggregation writes nearly $9 billion worth of volume through its 1,500-strong broker network and set out an example of what it costs to distribute loans.
Using a hypothetical example, he suggested that if a company wanted to distribute about $10 billion with the broker channel, they would likely need a similar number of brokers.
However, he said that they would wear more than $260 million worth in personnel costs (including $13 million in payroll tax) to also cover support staff, management costs, and head office costs (accounting, marketing, compliance, HR, etc).
Rayson added that when you add in office space, insurance, professional development, travel, marketing and software costs, this number would ramp up to $330 million in costs.
Rayson said: “If we express that as a percentage of net asset finance (NAF), then we end up with that being about 3.3 per cent – which feels about right. But remember, this is just the point where the broker is covering costs; no one is yet making profit.
“And, in this hypothetical finance example, the company is wearing all of the distribution cost. But in our world, the brokers wear all of that distribution cost.
“I’m not talking about this to say that brokers are poor, or ‘woe is us’. But there are a lot of people in this room [from lenders] and I just want to make sure that – when they make decisions about their products and the way they are distributed – they take the cost structure of the distribution network into account.
“It does cost brokers a lot of money to have resources sitting there to enable lenders to be able to sell their products … they’re spending a lot of money and taking on a lot of risk and it’s really difficult for broker out here. Margins are under pressure for everyone; wages are going up, everything’s changing. But brokers haven’t had a real pay rise for a long time. The economic model that pays brokers is still the same, but costs have gone up.
“So I just want lenders to think, or consult, or engage with the industry before they just make arbitrary changes to things in their products and systems. Because I think it is really important that they take that cost structure into account.”
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