Diversification - Becoming a one-stop shop

But changes in the industry started to prompt some serious soul-searching. Broker commissions were being cut, industry regulation was put on the table, the availability of credit dried up – and suddenly, being able to rely on another source of revenue was not only considered attractive, it was becoming critical to brokers’ survival.

These days, mortgage brokers who only offer home loans are becoming a dying breed, although many remain unconvinced that diversification represents best practice in broking.

For brokers who aren’t yet on the diversification bandwagon, however, the clear evidence of the business benefits may give them serious pause for thought.

DIVERSIFICATION'S HUMBLE BEGINNINGS

Aussie Home Loans is a good example of a business that has successfully embraced diversification. With $10,000 borrowed from a relative, John Symond founded Aussie Home Loans in 1992.

Aussie made a big splash in the home lending market, with a unique customer service proposition that included 24 hours a day service and loans far cheaper than those offered by the banks.

But Aussie’s rapid growth slowed down when the major banks wised up and started to make their interest rates competitive. Aussie was left to find a new direction to regain its place as a market leader. Under Symonds’s guidance, it reinvented itself in 2002 as a mortgage broker and began to diversify its business offering.

Today, 18 years on, Aussie is widely regarded as one of the industry’s biggest and best brokerages, offering a onestop financial shop that includes credit cards, insurance and car loans.

“If you can find solutions to all of your client’s needs then they won’t need or want to go anywhere else”

DIVERSIFICATION OF ALL SEASONS

Aussie is not the only example of a company that has diversified its business to great success.

In 2004 fast food giant McDonald’s reported a 25 per cent increase in revenue – its largest in 17 years.

Only 18 months earlier, it had posted its first ever quarterly loss. McDonald’s credited the dramatic turnaround to its new line of salads and other ‘healthy options’ in addition to its traditional menu.Its decision to diversify was a smart one.

Prior to 2004, McDonald’s was increasingly at war with the health industry over its public image as a purveyor of fatty, unhealthy food.

Consumers had even gone so far as to file lawsuits against the corporate giant, claiming that years of eating McDonald’s had made them overweight. McDonald’s response was swift. It diversified its menus and introduced healthier options, reviving customer interest – and its bottom line.

Today, McDonald’s customers can buy fruit slices for breakfast, as well as sandwiches and lettuce wrapped burgers, bottled water instead of soda, and full-meal premium salads. McDonald’s has even managed to f lutter its golden arches and seduce the Australian Heart Foundation into putting its ‘tick of approval’ on seven of the fast food giant’s meal deals.

Three years after McDonald’s revamped its offering, Coca-Cola Enterprises took a similar step. The global push towards healthier living forced Coca-Cola to diversify into new segments such as noncarbonated drinks and fruit juices.

The beverage maker even entered into an agreement with soup maker Campbell’s for the distribution of its V8 juice, as well as the acquisition of the glaceau water brand.

The bottom line benefits were again apparent, with the business posting a four per cent increase in sales, taking its revenue to $5.6 billion in 2007.

SEEING THE BENEFITS

A recent survey by The Adviser confirms that diversification in the mortgage broking industry is now the norm rather than the exception; with 70 per cent of the 300 survey respondents reporting that they offer products and services beyond residential mortgages.

There are two key drivers behind the decision to diversify – to build stronger, stickier client relationships and to build a strong business with a solid and diverse revenue stream.

Brokers that offer additional products and services will be able to provide their clients with a holistic service that meets all of their financial needs, creating deeper ‘stickier’ relationships.

However, while this client focus is certainly a key motivator behind the decision to diversify, forthcoming regulation may make this focus a mandatory requirement.

Under the National Consumer Credit Protection Act, brokers are now required to make reasonable inquiries of both the “consumer’s requirements and objectives and their financial situation” in determining what financial services to provide.

There’s little doubt too that through diversification brokers can build their business into a strong asset and one that will be able to grow in all market conditions.

The last two years have heralded commission cuts, the exit of a number of funders from the market, and a dramatic reduction in the availability of credit – which has forced brokers to look to other sources of income for their businesses to remain viable.

Mark Haron, principal of Connective, says he would like to see a 100 per cent take-up of diversification in the industry in the not-too-distant future.

“We encourage all of our brokers to diversify their core offering because it is a good way to ensure the future relevance of their business,” says Mr Haron.

“Your clients are stickier, but, more importantly, you are able to make more money out of every client you service.”

Will Foster, director of Property Planning Australia, agrees.

Originally a mortgage brokerage, his business is now a “one-stop financial shop”.

And Mr Foster says the biggest benefit of diversification – beyond the additional revenue – has been the ability to create “lifelong clients”.

“If you can find solutions to all of your client’s needs then they won’t need or want to go anywhere else. And, the next time they need financial advice, general insurance or even a home loan, they will come back to you,” he says.

TAKING THE PLUNGE

With such tangible benefits, it is easy to see why diversification appeals to so many brokers.

But what is the best way to go about it? Mr Foster says brokers need to consider a number of factors before setting out on the diversification path.

Firstly, they must decide whether they will expand their professional knowledge, hire specialist staff, merge with another specialist company or enter into a referral partnership.

The hardest part of diversifying, says Mr Foster, is working out your new business structure.

“Brokers need to ask themselves whether they want to hold on to as much equity as possible and thus hire additional staff or expand their own knowledge. [Alternatively] are they happy to dilute their equity and merge with other companies?” he says.

Property Planning Australia boasts a team of fullyqualified financial advisers, accountants, accredited home loan advisers and property professionals.

And there are plans to branch out further into stockbroking and property management in the near future.

A mortgage broker by trade, Mr Foster said he decided to hire full-time staff rather than expand his own skill-set and become an accredited professional in more than one financial service.

“I think if a broker tries to wear too many hats, they run the risk of becoming a jack of all trades and master of none. “I would prefer to specialise in one area and then advise my clients on where to go for the rest of their financial needs,” Mr Foster says.

THE ROLE OF REFERRAL RELATIONSHIPS

For brokers with insufficient equity in their business to hire staff, referral partnerships can be a good alternative.

Many of the major banks have ‘cross-sell’ programs in place that remunerate brokers for referring their clients on to the banks. These programs allow brokers to service their customers’ broader financial needs by offering not just home loans but other products such as insurance, personal loans, savings accounts and business accounts.

John Watts, director of Cairns Home Loans, uses one of the major’s referral programs to service his clients’ needs.

The mortgage broker has also built formidable referral relationships with an accountant and an income risk specialist.

And while he is remunerated for his referrals, Mr Watts says his decision to build several referral partnerships was not based on the potential financial rewards.

“I created referral partnerships so that I could keep my clients happy by servicing their financial needs.” Mr Watts says the imapact of the GFC forced him to look at expanding his offering beyond traditional home lending – which still remains firmly at the core of his value proposition.

BEWARE THE PITFALLS

There’s little doubt that diversification can be good for a broker’s bottom line. But it requires the right investment.

“Diversification will make your clients stickier and help you meet your duty of care. It won’t make you rich, but it will advance the level of trust between you and your clients,” says Pinnacle Finance broker Joanne Wall.

And when it comes to referral partnerships, Ms Wall says brokers need to be wary of the pitfalls – the most common being picking the wrong business partner.

Connective’s Mark Haron says it is essential that brokers choose a partner who complements their business model and goals.

“Picking the wrong partner can lead to tears. We advise all of our brokers to do the necessary research and pick the company that aligns closest with their own business model,” he says.

When researching prospective business partners, Mr Haron suggests brokers ask the right questions, such as: “What do you hope to gain out of this partnership?” and “If I was to refer my customers on to you, what remuneration benefits would you offer me?”

Brokers should also be cautious of spreading themselves too thin. Those who choose to diversify in-house and gain additional qualifications may find it difficult to find a balance between their various offerings. And if they choose to merge with another company, they have to be willing to reduce their stake in the business.

“Brokers who are looking to merge should ask themselves: ‘What impact will this merger have on my business model and my bottom line?’” Mr Haron says.

COMPLEMENTARY CROSS-SELLING

There are a number of key paths a broker can take when diversifying their traditional service offering. Brokers can offer complimentary products and services such as income protection, credit cards and general insurance.

Conversely, brokers can offer products that don’t necessarily go hand-in-hand with the traditional home loan service, such as personal loans, car loans or even commercial loans.

Alternatively, brokers can decide to open an entirely new business – such as financial planning or wealth management.

Mr Haron says most brokers opt for the ‘cross-sell’ option because it complements their existing offering and has the added benefit of growing their bottom line.

Macquarie Leasing offers brokers access to motor vehicle and equipment finance – which national manager for the proprietary distribution channel Stephen Light says are easily integrated into a broker’s current service offering. Brokers accredited with Macquarie Leasing are able to choose their own commission rate: anywhere between 0 and 4 per cent.

“For example consider a $45,000 motor vehicle transaction. Most brokers would earn around $750 to $1,000 as an average, which is pretty good for only a couple of hours work,” Mr Light says.

“And by diversifying into equipment finance, this will make your clients stickier and help you make more money from each client.”

DIVERSIFYING YOUR CLIENT BASE

While some brokers diversify to keep their clients sticky, others do it to attract new clients.

For brokers who are looking to diversify their core offerings to attract new clients, adding a new business or offering a new service rather than cross-selling other products and services is probably the better option.

Mr Haron says brokers need to take their time and do their research before any decisions are made. But the decision to diversify or not to diversify is a simple one.

“The industry is broadening its scope to include other financial services and brokers who choose not to diversify run the risk of being left behind.”

CASE STUDY: THE ARGUMENT FOR

Diversification can help a business flourish during down times, as Bernie Lewis Home Loans has shown.

Established in 1987, Bernie Lewis Home Loans is one of South Australia’s most recognizable brokerages. It was the first to introduce mainstream residential mortgage broking to South Australia and remains highly respected both locally and around the country.

But after two decades dealing in mortgages, the home loans provider decided it was time to expand its reach – a decision managing director Mark Lewis says was driven by a desire to both “de-risk” the business and ensure it remained relevant.

Three years ago, the business merged with KFG Wealth Management – expanding its service offering beyond home lending to offer clients a wider range of financial services.

“The merger quickly and effectively increased our revenue, which was a huge benefit. But better still, the customer experience was greatly improved, which was our initial aim,” says Mr Lewis.

Bernie Lewis Home Loans also doubled its staff numbers from 45 to 102 and future growth is on the cards.

But while the Bernie Lewis Home Loans diversification story ultimately has a happy ending, Mr Lewis says there were bumps along the way.

Prior to the merger, the business had tried outsourcing a range of services to referral partners, with limited success.

“[It] just didn’t work for us,” Mr Lewis says.

“Our referral partners either had different philosophies, or weren’t able to handle the amount of referral work we were giving them.” Instead, the company decided the best option was to hire more in-house staff, including a conveyancer, whose services proved invaluable.

“Since then we have recruited another three,” Mr Lewis says.

Mr Lewis says while ultimately it is easier for a broker to team up with another specialist business rather than take on the extra work themselves, many brokers fall into the trap of choosing the wrong business partner.

The most important piece of advice I can give is to choose wisely,” he says.

“Brokers shouldn’t try to be all things to all people. Instead, pick a partner that mirrors your commercial values and business goals.”

CASE STUDY: THE CASE AGAINST

Diversification can make a broker a jack of all trades but master of none – losing their focus, which is writing loans.

Territory Loans director Richard Black lives by the mantra: ‘If it ain’t broke, don’t fix it’.

The Northern Territory-based mortgage broker says his home loan customers provide him with more than enough work; so much so that he does not have the time to think about specialising in other areas.

“As brokers we can’t be all things to all people, so I don’t even try to be,” he says.

Mr Black says by wearing too many hats, brokers can be distracted by the range of services they provide, so much in fact, that the quality of their overall services may slide.

“I think brokers can get [so] carried away with diversifying their core offering that, in the end, they lose sight of what is important, and that is helping your clients achieve their dream of home ownership.”