The buy-sell cheat sheet: 10 golden rules for preparing to buy or sell a mortgage trail book

10 golden rules for preparing to buy or sell a mortgage trail book

Buying or selling a mortgage trail book need not be a difficult or angst-ridden process. All buyers and sellers really want is to increase the certainty of a sale proceeding and speed up the time to completion, so as to help avoid any nasty surprises.

With that in mind, here are our top 10 golden rules for selling or buying a trail book.

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How to use these challenging times to grow your brokerage

It goes without saying that large and small businesses alike are facing unprecedented challenges in the current environment. Brokers are certainly well-versed in how to hand tough times. What we know from those times is that where there are challenges there are invariably opportunities. Sometimes it’s simply a question of finding a partner to help you realise those opportunities when they present themselves. 

In 2014, Chris Booth caught wind of an unmissable opportunity. At the time, he and his other business partners were running a successful full-service financial advisory business, Announcer Mortgages (now Infocus).

When they were offered the chance to buy an undervalued client book, an acquisition that would allow them to increase their footprint and further diversify their business, they decided to try to pull together the funds to make it happen. Knowing the book would eventually appreciate, they hoped to engage, convert and grow as many clients as possible before selling the book at a higher multiple.

Chris Booth, Head of Lending, In Focus

Chris Booth, Head of Lending, Infocus

Finding funding

Having pooled their income streams, Chris and his partners shopped around for lenders to fund the purchase. Unhappy with the options available to them, Chris spoke to the Executive Director at his aggregator who facilitated an introduction to TrailBlazer Finance’s Managing Director, Jeff Zulman. Using a specialist trail book loan from TrailBlazer, Chris and his partners were able to borrow against Announcer’s mortgage trail book, rather than risk personal assets, in order to free up the capital to buy the book.

In the end, we proceeded with the loan purely because of Jeff and the team. They made themselves physically available to us throughout the process and it gave us great confidence, both personally and professionally, that we were making the right decision with the right lender.

Making growth happen

At the time of purchase, Chris was working with another part-time broker. While the business didn’t convert quite as many clients as they’d bullishly projected, they did manage to sign on around 500 fee-paying full-service clients from that book alone. By the time he and his partners decided to sell the business three years later, Announcer had increased in size to three full-time brokers, their client roster had more than doubled and the business had grown by almost 130 per cent in terms of the underlying trail. They subsequently sold the business to Infocus in 2017, repaying any remaining debt and banking a tidy sum.

Words of advice for brokers looking to grow

While Chris is the first to admit the industry is in a very different place in 2020, post-Royal Commission and mid-COVID pandemic, he would do it all over again. As a small business success story, does he have any advice for other brokers seeking to grow their business through acquisition?

Using borrowed money is a good way to acquire clients and build your business quite quickly. You have a warm opportunity to call which makes it so much easier than building a book from scratch. Would I buy a mortgage book right now? Absolutely yes, the multiples are good, even though the market has some unknowns after the Royal Commission.

Acquisitions done properly absolutely work. However, be ready for it to take far longer than you’d expect to work a client book effectively. Ultimately, you still have to win the hearts and minds of the clients. One of the biggest learnings from the financial planning industry is that they didn’t try to win the clients. You have to call and build relationships, be proactive and be positive. Building those relationships is everything.

Let us help

If you would like to find out about how we can help your business grow with our unique loan products for brokers and other white-collar professionals, please contact us on 1300 139 003 or at info@trailblazerfinance.com.au

Five tips to help you prepare your business for what comes after COVID-19

Words of advice for mortgage brokers and planners from an eternal optimist, TrailBlazer Finance Managing Director, Jeff Zulman

I am a person who thrives on stress. This is often much to the ire of my wife and family – work and otherwise. However, there are certainly times when the added clarity provided by a productive burst of cortisol can help shape the path forward when others are understandably mired in anxiety and indecision.

The COVID- 19 pandemic is, of course, a disaster on a global scale. Yet, perversely, it provides each one of us an opportunity to adapt, modify, seize the opportunity that change affords and ultimately thrive. The challenge is to retain enough presence to see the opportunity, even in a crisis situation.

My focus, as a businessman and financier, is on the things I can influence and change in order to prepare now for what will inevitably follow.

By way of example, my team has instituted daily Zoom “stand-up” calls. Previously these daily physical meetings were simply rapid-fire sessions designed to ensure we were all on the same page. Today, our Zoom calls not only ensure that clear communication continues, but they have become a vital vehicle for team engagement.

Of course, mortgage brokers and financial planners are well acquainted with working from home or small offices; coffee shops their second meeting room. Now we are all adapting to a world where young and old alike have a new litany of words in their Lexicon: Zoom, Hangouts, Webex. And there’s plenty of upside for our new virtual reality. We can bank the time savings gained from not sitting in traffic and commuting to client meetings, and in doing so improve productivity as well as increasing the frequency and depth of interactions – cut through the superficial and connect on a deeper level. When we deal with how people are feeling, just as much as what they are thinking, we can drive more genuine, long-lasting engagement.

So how do you identify those areas where you can retain control, adapt where you need to and identify and seize opportunities, however small?

What can you do to prepare for what lies ahead?

1. Embrace your learnings and see them as opportunities.
This time of crisis will ultimately forever shape and change the way we do business. As the founder and MD of a small business, by design, I have been able to build and scale my business so it can operate virtually. Most in the broking and planning community would find themselves in a similarly fortunate situation. There is a chance many businesses will never look back from having remote workforces. I will certainly encourage my team to continue to work increasingly from home– provided they remain goal-focused and productive. I see these six months as a training ground for a new, more virtual tomorrow.

2. Sniff out inefficiencies and solve them.
Process improvement. A lot of us despise the term, and like even less identifying, designing and implementing process enhancements. But all of us know that there is only upside if we can get it right. Think about how to do things better, faster and cheaper. Are there out of the box software solutions you can use to solve ineffective client management systems or product delivery? Where can you automate workflows and repetitive tasks? What gaps need to be plugged in the way you do things so you can do them better?

3. Futureproof. Adapt your business model.
A common cause of anxiety is around concentration risk and subsequent exposure. Diversifying your business – products, verticals– it takes time, cost and energy, but this sort of transformation has the potential to drive tremendous top-line growth and defray risk. It doesn’t mean you have to become an expert in a variety of new financial services yourself. Rather seek out others who have a similar profile, work ethic and value system as you. Together provide a broader range of services. Remember that often 1+1=3. We have helped countless clients build value in their businesses by embracing a more diverse revenue model through acquisition of established books of business, mergers, or funding the hiring of additional skills and expertise to target new markets.

4. Cultivate your relationships.
One thing we will come out of social isolation bearing is an appreciation for the strength of our relationships. We are seeing some of the best and worst, but largely the best, from other people, Governments and businesses, as we grapple collectively with the ever-changing situation. Collective goodwill and compassion are at an all-time high, so now is the time to reflect on how we can pay that forward in our personal and business relationships. People will remember how we responded during this time and it will colour the way we move forward.

5. Above all, prioritise.
Fight your battles and direct your energies where they most need to be focused–be that towards your families and well being, finances, clients or communities or, most likely, a combination of all of the above. Be kind to yourself and do what you can. Structure, routine and exercise help me keep moving forward. Where you can, try to prioritise and set realistic goals – it can be a good way to reclaim a sense of control.

I don’t know how long this will last, but I do know that the world will not come to an end in three to six months. It may be battered and broken in places and undoubtedly there will be a period of rebuilding, but ultimately many will emerge from this wiser and stronger, and certainly more resilient.

And we can help. We are here to do what we have always done, assist other small businesses to survive and thrive through uncertainty and beyond.

Just remember, you are more adaptable than you realise. Stay safe, be well and take care.

What do mortgage broking trail and pinball have in common?

A pinball machine sits in the reception of our offices. For stress relief, I am rather partial to the occasional game. It struck me that pinball is an ideal metaphor for mortgage broking: brokers are like the ball – constantly being bumped around at the whim of big external players, bounced off the bumpers to help others score points. For some brokers, the potential abolition of trail might spell “Tilt” or even “Game Over”.

But never fear, for what I’ve always liked about pinball is that it has five balls. So even if you suffer a loss, if you understand the game and how to play, you can keep playing. Here are some tips from a “pinball wizard” on how to play on in the current environment, and perhaps even earn bonus points and an extra ball.

1. The UK trail experience
In 2014, trail commission was banned on new products in the UK. Two years later, it was completely abolished. Yet concerns over churn have seen UK lenders pay retention fees to brokers, to encourage consumers not to switch lenders. In effect, these ‘retention fees’ are just another name for trail commissions. So even if trail is abolished in Australia, it seems likely that trail will reappear in another form – another ball.

2. Federal election pressure on the ALP
The Liberal party’s turnaround in their stance on trail clearly shows the power of political pressure. With the ALP still planning to remove trail for new loans from 2020, the Liberals’ win in the recent NSW state election could lead Labour to reconsider its position, as they try to win votes in the upcoming Federal election. Notice that the ALP rhetoric is starting to shift – they recognise that bumping the machine too hard could lose them lots of credits.

3. Our exclusive revenue projection calculator
We have built an indicative revenue projection calculator which is available here. Our modelling indicates that even if trail is abolished on new products, many brokers’ income will actually improve in the medium term due to the combination of larger upfront commissions, coupled with grandfathered trail payments. Think of it as a period of double scores and more points for playing on.

4. The FOFA experience
Even if the ALP wins the election and abolishes trail, they’ll have to enact legislation to this effect, which must then pass through the Senate. In the case of financial advisers, the FOFA legislation was supposed to be passed relatively quickly but ended up taking over 18 months. And even then, it was watered down from the original proposal. In short, even if the current trail regime does change, it is likely to be some time before any changes take effect. So there is time to play until the credits expire.

At TrailBlazer Finance, we’re optimistic about the future of the mortgage broking industry. We’re playing on, writing more loans than ever to help mortgage brokers grow their business. Whatever happens to trail, the game isn’t nearly over. In fact, I can see smart players racking up some pretty big scores.

Commissioner Hayne, what “heinous” crime did mortgage brokers commit?

The Royal Commission was charged with uncovering misconduct in the banking and wider financial services industry. The major banks were intended to be the primary target of the investigations. Instead, it seems the innocent bystander – the mortgage broker – stands accused. Not of wrongdoing, but of receiving potentially conflicted remuneration. By contrast, some of the testimony against the major banks was horrific. Yet, the Commission has chosen to penalise mortgage brokers over banks, leaving the banks’ core business largely unchanged.

Here’s why I believe Commissioner Hayne got it wrong for brokers, and what action we can take in response to Hayne’s recommendations:

1. The flawed user-pays system
First home buyers,those from low socio-economic backgrounds, and those with low financial literacy, are the ones who can least afford to pay for brokers’ services. They are also the ones who need brokers most. The user-pays system recommended by Hayne will harm those who need brokers most, when they are making the most expensive purchase of their lives. This especially at a time when acquiring, in many cases, the largest asset they will own. Let’s face it: stamp duty, mortgage tax, removalists fees and legals can’t be avoided. So, consumers being asked to reach into their pocket to pay yet another fee are going to struggle.

2. Reducing market efficiency
Let’s also do the simple maths on the costs of refinancing: today say $1,250 in administrative costs is charged; but if the borrower is required to pay a “loan arrangement fee” (regardless of whether this goes to a lender or the broker) –let’s add say another$2,500. If Hayne has his way, all of us who have a home loan will suddenly face a tripling of the cost of refinancing. The result? It will be cheaper to stay with a funder who has higher rates because the cost of switching is too high. Which means the broker who helps keep the banks competitive (by refinancing clients when banks reprice their back-book) are rendered ineffective by the tripled cost of switching. How does that help competition and keep the banks in line?

3. Consumers prefer brokers, not banks
Consumers have increasingly chosen to use mortgage brokers over going directly to banks. The broking channel has many advantages, including ease of use, cultural alignment and accessibility. Consumers have increasingly voted with their feet. It’s no accident that 60% of people prefer using a broker. Among those users, there’s a 96% satisfaction rating. With these figures, does the potential for conflicted remuneration really warrant the removal of commissions? This is akin to me deciding I would love to have a family and kids – but they might fight – and there may be “conflict”. So, let’s mandate celibacy!

4. Reduced competition
Very few banks have distribution networks across Australia, especially in rural areas. If consumers can’t access alternative funders because distribution channels have been cut off, then competition is restricted. Our small Australian market needs more, not less competition, to provide better choices for home buyers. Look at the case studies of the reduction in bank competition in the Netherlands or in jurisdictions where broker commissions were switched off only to be switched back on. Can’t we learn from others’ mistakes before we repeat them?

5. Built-in checks and balances
Commissioner Hayne is concerned that brokers could recommend loans with higher interest rates, or larger loans, in order to get bigger trail commissions. His solution? Abolish trail commission and eventually, abolish all upfront commission. But this misunderstands the separation in the role of the broker and the funder. It’s the broker who submits the loan and the bank that ultimately approves it. The broker certainly does not run credit. It is little wonder that the Productivity Commission concluded:

“Fixed fees paid by customers rather than commission structures have been proposed, and would eliminate conflicts, but the cost to competition would be high. Consumers would desert brokers, and smaller lenders (and regional communities with few or no bank branches) would suffer much more than larger lenders, if customers were required to pay for broker advice.“

So, what now?
If enforced, Commissioner Hayne’s recommendations will punish not the banks who charged dead people, but consumers and brokers. I see the punishment, but I am struggling to see the crime. It’s as if an industry has been judged “guilty” before any misconduct occurred! The debate has entered the political arena and the “talk tough” posturing is being used to win votes in the next election.

So, what can you do? Unite like never before. Rally the support of those who have happily used your services. There are literally hundreds of thousands, if not millions of happy consumers who can testify to the value of brokers. Call on them. Ultimately, politicians are interested in votes and re-election, so make it about consumers and voters, not you and broking.

If enough Australians express outrage, the Hayne recommended life sentence has a good chance of being modified and selectively implemented, rather than being blindly enforced.

Join me in the lobbying the Government here:
https://www.change.org/p/federal-treasurer-josh-frydenberg-save-the-mortgage-broking-industry

And show your support for the broker channel here:
https://www.brokerbehindyou.com.au/

As Martin Luther King Jr once said, “Our lives begin to end the day we become silent about the things that matter.”

Banking Royal Commission: Is the sky falling for mortgage brokers?

Within hours of the Hayne Royal commission’s final report being handed down, I was inundated with calls from clients and interested parties, all of the mortgage brokers. Although their words were different, there was a common theme: “Should I be worried? What has happened to the value of my trail book?”, they asked uneasily.

With the Commission recommending the abolition of trail commission on new loans – and the sitting Liberal Government pledging they will enact this recommendation from July 2020 – it’s no surprise that mortgage brokers are concerned. But brokers needn’t panic.

Brokers can take comfort in the knowledge that our valuation methodologies have always focused on the value of the trail in force; with no presumption of the new trail being earned after the valuation date. At times that conservatism may have seemed draconian; now it feels justified. As long as the existing trail is ‘grandfathered’, it continues to exist and therefore remains a source of value and at this time no changes have been made to valuations algorithms.

But what multiple will people pay for that trail? That is a question of supply and demand. Market forces always trump theoretical valuations. In the rising bull-market we experienced over the past few years, books often changed hands at premiums to valuation. This is no different from what we’ve seen in the property market. If there is panic selling or a rush to exit, books may trade at a lower price for a while.

At the same time, it’s important to remember that the Commission’s recommendations are just that: recommendations. Until the Senate passes new laws, their commendations are not binding; politicians can change their stance depending on constituent pressure (think Malcolm Turnbull and climate change); and with elections looming we don’t even know which party will be in power, let alone what will be traded, as politicians wrangle to be elected.

In the meantime, as long as funding lines don’t dry up, it’s business as usual. We continue to receive calls and emails from brokers seeking guidance, funding and exit options and buying opportunities. Brokers are resilient beasts (they have no choice!) so I expect that most will adapt rather than succumb.

I’m proud to share that only today we issued an agreement to acquire a book at a valuation agreed last year– so we are standing our ground and supporting brokers as they face the changes and transitions likely to arise out of the Royal Commission.

2019 is likely to be a challenging and scary time for many in our industry. And Australia may – depending on political manoeuvres – join most other countries in not paying trail commissions to brokers. While this could become our sad reality, it is not the end of the road for well-resourced and well-capitalised brokers. On the contrary, those brokers who are able to adapt are likely to flourish, as struggling participants exit, or are absorbed into larger groups, and the market thins out. Those with the means and the will to persevere will not only survive but very likely emerge larger and stronger.

Unlike the fictional Chicken Little who created hysteria with her scaremongering -“The sky is falling!” – I am confident that the Hayne Commission’s findings do not spell the end of the broking industry for all.

Whether you’re a mortgage broker, financial planner, rent roll business owner, accountant or other cashflow business, we can understand and support your specific business goals and needs.

Contact us

Suite 401, Level 4, 59-75 Grafton Street, Bondi Junction NSW 2022

1300 139 003

info@trailblazerfinance.com.au