Referral partners: Profitable or perilous?

Indeed, in a recent survey of Australia’s Elite Business Writers and key top performers from 2012’s Young Broker of the Year ranking, over 52 per cent of respondents said they currently have five to 10 referral relationships in place, and nearly 80 per cent intend to build more business referral relationships this year.

A clear majority of the surveyed brokers neither give nor receive a payment for referral. However, over 30 per cent said they have a financial arrangement in place with at least ‘some’ of their partners.

Australia’s Broker of the Year, Rate Detective Finance’s Warren Dworcan, concedes he has varying structures in place for different referrers.

“I try to pass on as little as I possibly can for a few reasons,” he says. “It’s not just about having more money in my pocket – which would be nice – but it’s about finding ways the relationship can benefit both parties without money changing hands.”

Mr Dworcan says passing too much money on also limits his ability to effectively remunerate and reward his brokers.

“I need to be able to attract quality brokers and be able to reward them sufficiently,” he explains. “As soon as you start flicking on 40 per cent of your commission and you start looking at paying your broker and the costs involved, there would be very little money in it.”

Payment parameters

Mr Dworcan says when he does have an arrangement in place, he does let his clients know that money will be changing hands.

“If you are doing it, I think it is important to let your clients know that there is going to be income passed on to someone else,” he says. “And generally you’d have that written into the documents that you have anyway.”

Gadens Lawyers’ partner, Jon Denovan, says it is the obligation of the referrer to disclose the financial agreement – whether that be a broker passing on business to another professional, or vice versa.

Sometimes, he concedes, this could be out of the broker’s control.

“It’s the obligation of the referrer to disclose it,” he says. “Whether a referral partner does that or not, is probably a bit out of the broker’s control sometimes – but the obligation is there.”

Mr Denovan says in the past, some brokers have entered perilous territory with referral partners, simply by not taking enough care with their selections.

“First of all, one of the big problems with referral partners is brokers tend to get very close to some dodgy operators,” he says. “So you really want to make sure your referral partner has good business practices and a good reputation.

“If you lie down with dogs, you get up with fleas.”

He says, ultimately, laziness in this area is more likely to cost the broker.

“We know it will be the regulated person’s problem – so in this case, the broker – if any issues arise,” he warns.

Wesley Neave, principal mortgage adviser at Corporate Financial Services, specialises in finance for the pharmaceutical industry and has referral partners who specialise in the same sector.

“We find that probably 80 per cent of our referrals come from pharmacists,” he says. “We just have a network that refers and because pharmacy is very much partnership-based, usually when we do something for one partner, the other partners come on board as well. And it snowballs from there.”

Mr Neave doesn’t have any financial agreements with his partners because he says they would be difficult for both him and his partners to implement.

“I think you’ll find, especially with accountants, that it is very difficult for them to accept referral fees,” he says.

“What we generally do is we just have a good functioning relationship where we refer clients to each other and then you don’t have to measure anything. We simplify it by not having any monetary benefits in place.”

Mr Neave says instead of a traditional commission payment system, he is currently considering a more charitable structure.

“We are considering arrangements where we support charities that are attached to the industry. But we’re looking at all the legalities of that before we set up the structure. So that is in its early stages,” he explains.

“In a lot of cases, people don’t want to take money from you anyway, but we’re looking to create some differentiation.”

Mr Dworcan is implementing a similar arrangement.

“I’d rather not pass anything on in terms of income,” he says. “That would be ideal.

“What I’ll do is, if they need assistance for some kind of sponsorship or charity or something, that’s when I will put my hands in my pocket.

“We work together to try and create mutually growing businesses. You’re providing a quality service to someone else who has another business. You need to reinforce their strength and the quality they serve their clients with by referring quality business to them.”

Recording the relationship

Mr Denovan says brokers have a number of compliance considerations when looking at their referral relationships – and realistically, the finance side of the equation isn’t the most pressing.

“If the referrer is going to provide details of the borrower – in other words, pass on the customer’s information – then under those circumstances the broker has to have a written agreement with the referrer and has to keep a register of referrers,” he explains.

“I’ve heard of ASIC [Australian Securities and Investments Commission] arriving at people’s offices and saying ‘Show me your register of referrers and copies of your agreements’.”

Mr Denovan says, in most cases, brokers are woefully unprepared for this requirement.

He says referrals also come with varying levels of formality, which can change the game and in turn, the requirements once more.

“There are different rules for the different ways the referrals come. The only really useful referral is not a referrer who says ‘Why don’t you go and ring up this broker?’, as the customer might never do that,” he says.

“Rather, the referral which means something is when someone says to a broker, ‘This person is looking for a home loan. Their phone number is…’

“If I pass that information onto a broker in a professional capacity, the broker has to have a referral agreement with me. They have to keep a register of who they have referral agreements with. Then, when the broker first contacts the customer, they have to describe the words that are set out under the regulations. It’s all a bit of overkill, but that’s the law.”

Mr Denovan says most referral relationships and structures are incidental to people’s businesses – they are not their primary focus.

“The rules only arise when it’s a business like a real estate agent, who is doing the referrals incidentally to their business. But once it moves from being incidental to their business and becomes the main thrust of their business – like they’ve got a whole division which just sits there making referrals all day long or sourcing leads – then they need a licence,” he says.

“It almost stops being a referral then.”

Mr Denovan says less formal referrals are far less regulated.

“A lot of referrals come in a different form. Mums and dads can refer people to brokers all day long and there are no rules about it at all,” he says. “In my private capacity, I could tell you to go to Aussie Home Loans and I could be getting a commission for that and there are no rules around that at all.”

Adding value

James Pibworth, managing director of Iconic Home Loans, is also keen to avoid financial incentives with referral arrangements – and says he doesn’t need them.

Mr Pibworth works with several building companies within a group and says it’s about adding value to each other’s businesses.

“We don’t need to pay because we’re adding immense value,” he says. “We use finance as a tool for them to be able to do their jobs, which is to sell more homes.

“The referral partner isn’t looking to you specifically as a means of income. They’d rather you use finance to help them do what they do.

“We hold the client’s hand throughout the whole process and enable control of the sale. We do a lot of work and it benefits both businesses.”

Mr Pibworth says, to avoid any compliance concerns he works extensively with his referral partners.

“We offer training to our referral partners. So each building brand has a general manager and a sales manager. I work with the general managers and sales managers and my brokers work with the reps,” he says. “We cover compliance and everything they need to know about the legislative requirements. We cover how the finance process works, what the banks are doing and what they’re not doing, and the business’ obligations under NCCP [National Consumer Credit Protection Act].

“They’re allowed to get the details of the lead, but they’re not allowed to give any advice. They can’t discuss rates.”

Mr Pibworth says despite the hurdles and the extra effort, the relationships are important.

“Our business has grown exponentially because of our arrangements,” he says. “We add value and in turn, we have value added. We have diversified, expanded and benefited.”