As the industry goes through a period of significant consolidation, the classic mortgage broker and aggregator relationship is being challenged by a range of mostly in-house schemes involving lenders, franchise operators, real estate agents and property developers. We look at the some of the arrangements on offer to brokers and attempt to find some answers to the question: could you be better off somewhere else?

The recent move by property developer Stockland to set up its own in-house mortgage broking arm has highlighted the diverse range of employment options open to brokers who do not want to go it alone.

While experienced brokers who have been in the game for a long time can draw heavily on referrals from existing customers, getting those initial customers through the door is a major hurdle for anyone starting out.

Most in-house broking models offer the comfort of some sort of referral arrangement, but the level, quality and consistency can vary quite noticeably.

Getting the leads you need

Working at the top end of the in-house referral model is Ben Eick, a franchise owner for L.J. Hooker Financial Services, who said that approximately 90% of the deals he writes are referred to him from local L.J. Hooker real estate agents.

Eick says he is particularly lucky with his referral arrangement. As the franchise owner for the Hunter region in New South Wales, he has four L.J. Hooker real estate agents in his district, who all refer clients to him. He says that some of the other franchise owners are not as fortunate and have to fight for referrals.
"It's up to us to go and establish the relationships with the [real estate] officers. They can refer to whoever they want. Obviously they're encouraged to refer to us, but there's no rules in concrete that they have to," says Eick.
But, he says, the agents are expecting L.J. Hooker brokers to call and they are always well received.

Working at the other extreme is Lindsay Rogers, a broker operating through the Aussie Home Loans' representative channel, who has to source all his own leads.
Aussie also has a consultant channel, which receives leads from the contact centre, but Rogers opted for the tougher channel because of the increased commission.

While most brokers crave referrals, quality is also an issue. For Morn Barnes, a mortgage connect licensee with St.George Bank, one of its commission-basis mobile lenders, not all the referrals he receives from St.George are beneficial to his business.

"The negative is that we have small loans for refinancing coming through as well, where we hardly make anything on it, we don't get a trail commission and we don't write a big enough loan to make it worth our time."

However, Barnes does add that he receives a good, qualified lead about once a week.

"It does help get a steady flow of new business coming in and new people who you can get other referrals from," says Barnes.

Virgin Money, which has only recently embraced the concept of using brokers, offers a different approach to sourcing new clients by cross-selling them other related products such as insurance and superannuation. James Duffell, a non-bank manager with Virgin Money, says the customers are often very receptive to the cross-sell.

"It's less of a hard sell and more of a ... 'well you love our credit cards, do you know we did home loans', and they've already bought into Virgin," says Duffell.

Is brand important?

In an image-conscious world, brand is considered by some to be of huge importance.

For Duffell, his initial attraction to Virgin was the brand and it continues to be a driving factor.

"It's a really great brand. It creates a lot of business and opens a lot of doors... Having the opportunity to work with that brand in a face-to-face environment was really attractive to me," says Duffell.

But Duffell says the downside is that many of his customers just want to talk about Richard Branson.

"So rather than talking about our great products they want to talk about what he's doing with Virgin Galactic," he says.

Virgin is not the only organisation focused on brand. Aussie's 'household brand' is something its brokers feel strongly about.

"There's the credibility you gain from the strength of the brand... As a broker you've got the name backing you up on your business card. I think that's very important for your credibility when you're sitting down with customers," says Rogers.

For Barnes at St.George, the backing of the St.George brand was of huge benefit in getting his business going.

"I feel like a lot of people see me as St.George. I'm not just some wannabe broker who's starting up by myself with no credentials. That's definitely a benefit," he says.

But aligning oneself with a major brand can also have its negatives, according to Darryl Simms, the managing director of Access Loan, a brokerage consisting of two loan writers.

"I see it as best to have an individual identity... It's another task, but it means you've got a free rein on it. I'm in control," says Simms.

Simms says that if a handful of operators were to damage the brand, it could rub off on other people's businesses as well. "Whereas, if I continue to do a good job with our clients, our brand can't be damaged," he says.

Economies of scale

While the number of lenders on a broker's panel can vary from one to more than 30, it is debatable whether the size of one's panel is of major importance.

"At the end of the day, 80% of my loans are done through probably six lenders," says Rogers. "I haven't lost a deal because [Aussie] only has 18 lenders. You can always have more, but I just don't think you need so many."

James Symond, the new managing director of Aussie, is quick to point out that Aussie spent its first 10 years only selling its own product, but eventually chose to open up its range to include other lenders.

"We found that to truly make best use of our household brand and distribution channels we needed a wider product offering to the consumers," says Symond.

Following a similar path, Virgin's launch into home loans began with it using its distribution channel to mostly push its own product. It now has a small panel of prime and sub-prime lenders, should the need arise for a solution that cannot be met by the existing range of Virgin home loans.

"Ninety-nine percent of the business I'm writing is with Virgin, but it's good to know they're there if I need to use them," says Duffell.

For Virgin, the idea of providing customers with a full range of products extends beyond merely home loans into superannuation and credit cards.

"I think the main thing is you want to make sure all the customer's needs are met. They don't want to have three different bills from three different providers," says Duffell.On the flipside of the coin, Morn Barnes concedes that selling just St.George products has seen him lose a few deals because the bank wouldn't extend its policy.

"It does happen," he concedes.

Getting paid

At the end of the day, brokers work to make money, so commission structures are important.

Virgin's face-to-face team is on a commission-only arrangement and receive a base of 0.4% upfront and 0.2% trail with the potential to increase this based on customer satisfaction and cross-sell.

"I know that some lenders pay a higher commission, however, we have access to all these different customer bases. You can talk to superannuation customers and it's much easier to give them a home loan than to go cold turkey to someone in the street," says Duffell.

Duffell says he also liked Virgin's customer satisfaction incentive.

"I think that has huge potential. Not only are you generating cross-sell for Virgin and making them happy, but you're also doubling your commission," he says.

Brokers working with other organisations all speak very highly of their commission structures, but prefer not to disclose figures.

"Specifics are confidential, but the commission structure is competitive with other offers where leads are generated," says L.J. Hooker.

However, because L.J. Hooker sub-aggregates through PLAN Australia, both organisations take their slice before it reaches the broker.

"If I was to approach PLAN directly, we'd only get say 80% of the commission from the lender. But because of the size and volume we put through, we actually get 95% of PLAN commissions. Then of course L.J. Hooker take their cut and it ends up being about the same," explains Eick.

Simms, who also aggregates under PLAN, would also not provide details of his commission arrangement, but feels he is better off than operating in-house with one of the bigger groups.

"It varies depending on volume. It's a very fair structure," says Simms. "The commission structure is more attractive being independent."

Aussie also refused to provide specifics, but claims to have "very attractive commission structures across a wide variety of distribution channels".

Rogers does, however, admit that some brokers could consider Aussie's commission structure to be a negative - although he does not say why.

"I don't see that the difference in the commission structure is that great. I don't see it as a negative myself," he says.

Barnes doesn't think St.George is as generous as other lenders.

"I would say we get less on our upfront commission than other brokers. But if you're an independent broker and you worked through an aggregator, the aggregator might take more commission," he says.

So where do you go?

According to Peter Bromley, the general manager of L.J. Hooker Financial Services, the industry should expect to see more cross-consolidation and more big players emerging, and this could mean that brokers "want more support than before".

"Being an independent broker you don't have that marketing support, you don't get the technology, you don't get the communication, you don't get the help - and of course you don't get the chance to generate leads," says Bromley.

However, with an industry built by independent and entrepreneurial brokers keen to make it on their own, there will still be those who prefer to go it alone. And one shouldn't forget the reasons many brokers left their salaried positions in the first place.