Avoiding the lemons

According to data from the MFAA, more than 2,500 brokers have left the profession in the past two years and the peak industry body expects this number to swell to 4,000 within the next 12 months.

“We did some projections two years ago and said that with NCCP coming in, we expected to see our membership fall to 10,000, from approximately 14,000, within five years,” MFAA chief executive Phil Naylor says.

“We expect this projection to become a reality, as we currently have approximately 11,600 members.”

But while the requirements of the new legislation are largely to blame for the exodus, Mr Naylor says the lingering effects of the global financial crisis and commission cuts are also playing a part.

So, with a growing number of brokers exiting or considering exiting the industry, the opportunities to buy up loan books are increasing.

Many companies, such as Advantedge, run ‘buy and sell’ trail programs to help brokers both who are looking to get out of the industry and those who are looking at ways to boost their business presence quickly and with the minimum amount of hassle.

Advantedge launched its buy and sell program in February 2011 and the response has been overwhelming.

According to recent data compiled by the company, just under 30 brokers listed their books for sale in the first nine months, while more than 200 brokers registered their interest to buy.

Weighing up the benefits

Buying a loan book is a great way for brokers to instantly increase their business footprint.

“I think it is hard to start from scratch today; building your business from the ground up would involve a broker to go without an income for about six months as well as require them to have pretty good referral sources straight up,” says Advantedge’s head of financial solutions, Craig Saville.

“When you buy a book, you get automatic access to an income stream straight away.”

Better yet, it provides brokers with a number of new client prospects who could, if handled properly, become a source of extra revenue.

“When you buy a loan book you have got the opportunity to go in, contact all the clients, review their needs and further cross sell any products and services into that book, effectively increasing the value of the book,” he says.

And best of all, according to Mr Saville, a majority of a broker’s client base will be Gen X and Gen Y borrowers.

“Unlike financial planning, where the majority of clients are baby boomers, brokers tend to have younger clients on their books, which opens up excellent opportunities for the book purchaser,” he says.

Not only can brokers make these newly-acquired prospects clients for life, but they also have the opportunity to cross sell to them.

“The younger they are, the less likely they are to have insurance, or car finance etc,” Mr Saville says.

Nevertheless, while the benefits of buying a loan book are obvious, brokers who are contemplating a purchase need to make sure they do their due diligence first before pushing ahead.

And as Mr Saville explains, not all brokers are suited to buying books.

Do your due diligence

While loan books vary in price, virtually any purchase will require a broker to have substantial funds behind them.

Brokers who are brand new to the industry may therefore not be in a position to buy a book.

Rather, they will likely appeal to well established brokerages looking to build their local footprint quickly and with the minimum amount of hassle.

Even if a broker is in a position to buy a trail book, adds Mr Saville, that doesn’t mean they should.

“First, you need to make sure your business is big enough to accommodate the amount of work the book comes with,” he says. “You need to make sure you have enough staff to take on and manage the files as well as see and review clients.

“Brokers should never bite off more than they can chew,” he says.

So, how will a broker or brokerage know that the book they are looking to buy is right for them and can be successfully integrated into their business?

The answer is simple: due diligence. Determining whether a loan book is a sound investment will require a broker to look at the quality of the files and verify all information given.

Brokers need to ensure client contact details are correct. In addition, they should look at the types of loans the book contains and the percentage of the book that is currently in arrears.

While books that have a low percentage of loans in arrears will be more expensive, a greater outlay at the onset could prove priceless in the long run.

“You also want to make sure the person you are buying the loan book from is contactable after the fact should you have any queries and need to go back to them for more information,” Mr Saville says.

For many brokers, it might just be safer to buy books through a dedicated buy/sell program, like the one currently driven by Advantedge.

While the Advantedge program is only available to Advantedge brokers, programs such as this take the required leg work out of the process.

The program’s organiser, for a fee, will complete all due diligence and ensure the book the broker is looking at buying represents a wise purchase.

Life after purchase

Once a broker has purchased their loan book, they should make contacting the new clients their number one priority.

“The key is to ensure the handover is warm,” Mr Saville says. “Work with the seller in contacting all the new prospects to let them know of the new arrangements.

“Make sure contact is made with the new clients within 30 days of the transaction, whether that be by letter, email or phone.”

If handled correctly, brokers should enjoy very little client runoff and indeed maximise the returns on their new book.

It will probably feel like a hassle for a borrower to have to change brokers, so the key is to make them feel safe and secure and to establish a relationship based on trust as early as possible.

Not only will the borrower be less likely to look elsewhere, but the broker may well create a brand new client for life.