Referral relationships - Top secret

The value of a ‘warm’ referral from a professional is hard to match via other channels and so having a trusted network of referral partners is seen as a business cornerstone by many brokers.

But forging productive referral partnerships is no easy feat these days.

The best professionals generally already have established partnerships in place or they have had their fingers burned by poor service from brokers in the past. With 10,000 brokers out there vying for business from real estate agents, financial planners, accountants and other prime sources it is little wonder that you have to stand out from the crowd if you are to beat your peers to the punch.

To give brokers a better chance of understanding the needs, wants and dislikes of prospective referral partners The Adviser looks at the flipside of the referral coin.

We reveal the trials and tribulations of having referral arrangements with mortgage brokers from the referrer’s perspective and the insights are enlightening. But first we consider the state of play since the implementation of licensing.

According to a recent sentiment survey by The Adviser, 67.8 per cent of brokers intend to build more business referral relationships this year.

However, while the practice of referring business is commonplace, a significant number of brokers is failing to meet industry requirements.

Under the National Consumer Credit Protection Act brokers are required to have a referral agreement with partners that are not a licensed credit representative or who do not hold an Australian Credit Licence (ACL).

In addition, brokers are required to keep a register of all referrers and make known to their clients all processes involved in the referral activity.

So just how has the NCCP changed the way brokers enter into referral relationships?

According to Jon Denovan, senior partner at Gadens Lawyers, it hasn’t.

In his experience, only one in 20 brokers has a referral agreement.

“I think that most brokers are just going on as if nothing happened,” Mr Denovan says.

“It’s not because they are trying to be dodgy,” he says. “It’s just because they don’t really know that if they are getting referrals from somebody who is in business they need to have a referral agreement and they need to have a referral register.”

Mr Denovan’s comments echo the results of The Adviser’s August referral partnership survey, which shows that of the 219 broker respondents 68.7 per cent admit they have seen no change to their referral relationships since the NCCP.

This suggests a majority of brokers in Australia have not taken the proper measures to ensure their referral relationships are in accordance with licensing regulations.

And while it may seem fairly innocuous, failing to meet NCCP obligations is an invitation for ASIC to dig further and see what other black marks you may have, Mr Denovan says.

“I think it’s something that ASIC will look at sooner or later,” he adds.

Making sure you are compliant may require a greater level of due diligence, but in the long run it will be worth the extra work.

MUTUAL BENEFITS

One of the main reasons why referred business is so valuable is that conversion rates for referred clients are much higher than for regular ‘walk-ins’.

By having a network of referral partners in horizontally integrated industries, brokers and their referrers can both gain from servicing their clients’ total needs.

“The leads that you get from referral partners are usually pretty warm leads,” Kandu Finance director Jeana Scott says.

“They are usually relating to a specific transaction,” she says. “So if you’re dealing with accountants and financial planners, it is usually relating to some sort of wealth creation strategy, whether it is property investment or market investment or just straightforward refinancing.”

Ms Scott has built her business around strategic partners and now has 85 per cent of business channelled from referrers.

The majority of brokers surveyed by The Adviser claim between 10-25 per cent of their business is generated from referral partnerships.

Finance Made Easy’s Tony Bice is of this ilk, with 20 per cent of his business coming directly from referrals.

Mr Bice believes referrals can save brokers time and money.

“The referral is more likely to get off the ground rather than trying to leverage business through marketing activities,” he says.

“In other words they are a stronger type of lead as the client is normally ready to go and has a purpose for wanting to move.”

Referral partners can come from a number of professions aligned with the finance industry such as property buyer’s agents, insurance advisers and builders and developers.

According to The Adviser’s August referral partnership survey, one of the largest professions of referral partners are accountants, at 64.8 per cent, followed by financial planners at 49 per cent.

Keshab Chartered Accountant principal Munzural Khan has been referring his clients to brokers for more than three years and currently counts five brokers as referral partners.

Provided you find the right broker, Mr Khan says, the relationship is mutually beneficial as the two industries complement each other.

“Brokers bring in the referral source to start with, but they also expand our brand and our goodwill,” he says.

As an accountant that specialises in property, Mr Khan is often called upon by his broker partners to help out with tax returns and cash flow statements.

Each month he refers upwards of 20 clients to brokers, and while he only receives a handful from each broker in return, having multiple brokers on his panel keeps things on an even keel.

“I probably receive three to five per broker each month,” Mr Khan says.

“But I’m quite happy with that arrangement because I don’t just deal with one mortgage broker. There are multiple mortgage brokers that I deal with so three to five referrals from each broker works out pretty well.”

Keeping in regular contact with referral partners is essential for a partnership to be effective.

Referral relationships cannot survive without being reviewed on a regular basis.

This means maintaining communication and providing regular updates on how the business is going, as well as areas of weakness and how they might be improved.

“I hear from my brokers quite often,” Mr Khan says.

“I would like to hear from them as often as possible, provided it is efficient from both sides, because at the end of the day everyone can be quite busy and occupied,” he says.

LOUD AND CLEAR

Establishing a relationship with an industry professional involves sharing the same values when it comes to the end customer.

Brokers who align themselves with businesses of similar interest often find the relationship grows organically out of a foundation of mutual understanding.

Perhaps unsurprisingly, real estate agents make up the largest proportion of industry professionals with whom brokers have referral relationships.

According to The Adviser’s latest sentiment survey 69.7 per cent of brokers currently work with an agent on a referral basis.

Communication is the key to a long and healthy referral relationship, PRD nationwide Newcastle and Lake Macquarie director Mark Kentwell says.

“We need to know at each stage of the transaction where things are up to,” Mr Kentwell says.

Once a broker has agreed to see one of Mr Kentwell’s clients, he is quick to see how the appointment went.

A simple call to the broker keeps the channel of communication open and helps qualify where the buyer is up to in the process.

Right Property Group director Victor Kumar has run into trouble with brokers in the past and says staying informed is a top priority.

After taking on a broker with promising initial results, the relationship quickly turned sour after a communication breakdown – with negative consequences for the client.

“Things went from bad to worse and the broker did not keep to the communication standards to our referred clients as agreed,” Mr Kumar says.

Fortunately for Mr Kumar the issue was resolved and the referral agreement terminated.

Now, with a referral network of five brokers, things are once again running smoothly.

“Our referral partners talk to us on a weekly basis to give us updates and get updates on the status of our referrals,” Mr Kumar says.

In addition to mapping out an agreement early on, brokers and their referral partners should work with each other to better understand their respective businesses.

The advantage of this is gaining a deeper level of understanding of how the business operates, what the partner’s values are and what processes are involved when dealing with customers.

Referral relationships should be seen as an ongoing education process, Keshab Chartered Accountant principal Munzural Khan says.

“To make the relationship between a broker and another professional mutually beneficial, I think it’s quite important that each party helps educate the other on their service offering,” Mr Khan says.

“I find the relationship works really well when I understand on basic terms what the bank is after and what the broker needs to provide,” he says.

“It doesn’t mean that I’m a specialist in mortgage broking – I’m not, I’m an accountant – but just knowing enough to ask the right level of questions and to provide the right level of information to my clients is important.

“I think there is a responsibility on both sides to help each other with that.”

But despite keeping in touch on a regular basis referral partners can still run into trouble.

Maintaining a sound professional relationship based on trust and integrity can be challenging, particularly when it comes to quality of service.

Differences of opinion can drive a wedge between brokers and their referral partners; understanding the root of the issue will help both parties avoid future hiccups.

OVERCOMING DIFFERENCES

One of the biggest challenges for referral partners is sharing the same values with their broker partners.

This almost always comes down to the best interests of the client, Keshab Chartered Accountant principal Munzural Khan says.

“Making the broker dream the same dream as the client and appreciate that dream is one of the challenges of these types of arrangements,” Mr Khan says.

While Mr Khan admits he has never had to get rid of a broker, he is selective about the brokers he chooses.

Having a panel of broker partners enables him to match each individual client to a broker similar in temperament.

“Some brokers’ natures are a little bit more creative and a little bit more assertive, while others may be significantly more conservative,” Mr Khan says.

“Some may have more stretch with different lenders than others and some may specialise in areas that others do not,” he says.

“You need to have that diversity and flexibility to suit a broad range of clients.”

Arriving at a mutual understanding is crucial for a referral relationship to work successfully.

The rules of the working relationship should be established early, in writing, to avoid future foibles.

One challenge that continues to disrupt professional relationships is a conflict of interest, PRD nationwide’s Mark Kentwell says.

“In the past, some brokers have been known to put people in front of an investment property because they’re getting a commission out of it, or tell them that it’s the wrong area to buy or even try turning them off selling their own property because they know if they refinance their two mortgages they end up with bigger trailing commissions,” Mr Kentwell says.

“They just need to understand that even though they are going to get a deal out of a buyer, we don’t get paid unless we get a sale,” he says.

“Obviously everyone wants the right thing by the client, but brokers have to be careful not to bite the hand that feeds them.”

To avoid burning bridges, brokers should treat their referral clients with a higher level of care.

After all, another person’s reputation is on the line.

Taking good care of a referral means taking care of referrers, and can guarantee a constant stream of clients well into the future.

“If a broker finds three or four agents or one large firm that’s referring business to them they can just about close their doors and do business off those referrals,” Mr Kentwell says.

“Referral business is the cheapest form of marketing and gets you the highest quality leads,” he says.

One issue that comes up time and again is the option of a referral fee.

Some feel a kickback is acceptable for a referral arrangement, while others strongly oppose it.

In the past, Mr Kentwell has preferred not to take payment for referrals.

“It minimises disclosure issues,” he says.

“It’s a more genuine referral as far as the client is concerned,” he says. “They know that they are being referred to someone who is going to do a good job and not just because they are getting a kickback.”

On the other hand, Finance Made Easy director Tony Bice pays formal referral partners an agreed percentage of the upfront fee.

Keeping a referral register has helped keep tabs on referral payments, Mr Bice says.

“It’s a good way of tracking clients in order to pay that referrer a fee,” he says.

Kandu Finance’s Jeana Scott is currently in the process of reviewing her entire referral network to fit her evolving business needs.

Ms Scott had paid and accepted a referral fee in the past, but the NCCP regulations have created an unreasonable amount of work for the broker.

“The work that we have to do and the due diligence that we have to undertake means it really is not financially viable to do that anymore,” Ms Scott says.

“I personally do not see myself dealing with any referrers in the future that expect me to charge a fee,” she says.

“The ones that I have approached so far have agreed with that change in the referral arrangement.”

For referral partners, having a trusted broker who services referrals with a progressive attitude is more important than being financially compensated.

“Trust and integrity are the most important things,” Keshab Chartered Accountant principal Munzural Khan says.

“Creativity and assertiveness comes second and beyond that, I would hope that all of my broker partners strive to go that extra mile when dealing my clients,” he says.

Referral agreements must be between two individuals, not an individual and a business.

Referrers should be mindful of the specific broker they pass their clients onto, PRD nationwide’s Mark Kentwell says.

“It’s not just the firm you’re dealing with, it’s the employees of that firm.”

“A word of caution to those dealing with firms is that you need to know the person who is going to be talking to the client,” he says.

“If you refer them over to someone who is a great salesperson or the director of that firm and they are fantastic, great, but if someone else is dealing with them and they are not proactive and they don’t understand the importance of your referral relationship, they might not treat your leads as well as they should,” Mr Kentwell says.

For this reason, finding a likeminded broker willing to go the extra mile is crucial.

“A can-do attitude is the number one thing,” he says.