Bigger doesn't necessarily mean better

A look at small brokers

While major aggregators have embarked on a campaign warning brokers to seek safety in numbers, Kate Carr spoke to some of the smaller operators and found them remarkably unfazed and determined to play their part

'The mortgage industry is consolidating with aggregators coming and going,' warned a recent PLAN advertising campaign. 'Is your future in safe hands,' chimed AFG's recent media blitz.

The stability of small and medium aggregators has never been more in the spotlight, with the big players hoping to attract an influx of brokers worried about the financial stability of their current aggregators in these uncertain times.

BankWest's recent decision to dump 59 aggregators that failed to meet its volume requirements has only made matters worse for smaller and mid-tier aggregators and with a well-placed source telling Australian Broker another major lender was set to make similar cuts, the problem does not seem likely to go away.

Don't worry, be happy

However, despite the doom and gloom, not all of the industry's smaller players are worried. FastTrack Finance Group director Jim Williams, for example, told AB he was doing nothing special to reassure his members, dismissing the recent advertising campaigns as nothing unusual.

"The brokers we have agreements with have been there and done that, and can see through what the larger aggregators are trying to do," he said.

"We are not worried about the larger aggregators one iota," he added.

Asked if he believed the majors were scaremongering to bolster their membership, Williams said: "They always have been.

"They have been from day one. But the brokers we have on our panel have all come from these major aggregators, and say they are not what they are trumped up to be."

Something different

He said many brokers came to his organisation looking for a new approach.

"They welcome our refreshing approach and the way we make sure commissions get paid on time and correctly," he said.

Director of Precision Finance Solutions Mark Redmond agreed with the attraction a smaller aggregator can have for brokers, noting that smaller aggregation companies certainly had important things to offer.

"I believe both [small and large aggregators] have their own distinct benefits of association and contribute in their role towards making the broking industry valued," he said.

But, perhaps illustrating the current problems minor aggregation firms are facing, Redmond revealed he has recently switched from a smaller firm to Connective, a move he says allowed him to take his business to 'that next level.'

However, according to Williams, bigger, more experienced firms are not necessarily best served by bigger aggregators, noting most of his clients are old hands in the industry.

"The brokers that we have are ex-bank managers that have been in the business for a long time and don't need to pay for the hand holding [offered by the majors]."

According to Williams, the larger players are best for new entrants to the segment because of the extras they offer.

"They make them go to training sessions, which they need."

He said because many of the larger aggregation firms took up to 20% of a broker's upfront commission as well as 20% of trail, they had to do 'all sorts of things to justify their existence'.

In contrast, Williams' firm takes 12% of the upfront commission, and nothing from trail, a fact he contends means FastTrack is actually better placed than some of its bigger counterparts to withstand the losses caused by falling commissions.

"[The majors] are reliant on their trail commission I can see that having some adverse effects. If they chop trail commission completely, some of these bigger organisations, which take up to 20% of trail, are going to feel the pinch more than I will. Their trail is going to drop dramatically and I think you will probably find their profitability will drop."

ASTUTE director Brad Wood agreed with this.

"I would think [the majors] may be in danger of losing market share not gaining it," he told AB.

"While it is fair to say the market generally is tougher today than 12 months ago, I don't believe it is any tougher for small to medium aggregators than it is for the larger groups."

Punching above your weight

According to FirstRock Financial's executive director Matt Corkin, the manner in which AFG and PLAN's advertising campaigns called into question the financial viability of all smaller firms was 'unethical'.

"In regards to the campaigns being conducted by the two main aggregators, we support a broker ensuring that their aggregator is financially viable," Corkin told AB, adding that it was "simply not ethical or professional" for the major firms to suggest smaller aggregators are financially vulnerable.

But while Corkin may strike a defiant tone, he is not burying his head in the sand in terms of the challenges smaller aggregators are currently facing, with FirstRock initiating a strategy day for mid-tier aggregators on 27 June.

According to Corkin, the conference, which is open to all directors of medium-sized aggregation firms, will cover topics such as strategic discussions on buying power, along with offering an opportunity for participants to thrash out group structures that may offer access to economies of scale.

Keeping up quality

Apart from joining forces, Mortgage Gallery chairman John Bignell told AB another thing smaller firms could do is direct their energy towards building relationships with lenders.

"The reality is that the industry has six major operators and then there is a gap between the sixth and seventh," he said.

"For anybody who is not in the six, it's only natural you wonder about the thinking of the lenders. That's why we maintain a very close relationship with them."

He also noted that a tighter market made focusing on quality even more important for smaller aggregators.

According to Bignell, it is particularly important for smaller firms to approach the market on their own terms, rather than trying to beat the major players at their own game.

"We are not, nor have we ever aimed to be one of the bigger operators," he explained.

"That's not what our focus is. We just want to run a good solid business operation providing good quality business to our members and be low maintenance."

Rather than talking up the size of The Mortgage Gallery, Bignell emphasised the benefits of having a smaller operation.

"We are a lot closer to our network than [the bigger aggregators] could possibly be," he said.

"We know everybody on a personal basis, and are able to take a personal and professional interest in their development."

Consolidation

However, despite all the smaller aggregators AB spoke to being keen to emphasise their financial credentials, most agreed with the prediction of Alex Moulieris, the CEO of PLAN, that consolidation in the segment would occur, sometime in the future.

"I would not be surprised if there were some casualties," Wood said."I am of the understanding that there are groups out there that have borrowed to expand. In the current climate, I am not sure that that is a sound strategy."

Bignell also said he believed that 'further consolidations' were likely.

The overall message, however, was one of cautious optimism.

"I just think this is a challenge for all of us," Bignell said. "You can only deal with the hand that you've got before you.

"The little guys certainly haven't thrown in the towel."