Financial planners confront the challenge from mortgage brokers

While a number of companies rooted in mortgage broking have expanded into the financial planning arena, a roundtable conducted by Money Management has confirmed that while progress is being made, it remains an area of cultural, regulatory and legal challenge.

Mike Taylor, managing editor, Money Management: Okay, ladies and gentlemen. Welcome to the Money Management roundtable where we’ll be looking at the convergence of financial planning and mortgage broking, which are two pretty interesting areas.

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I’d like to kick the session off by raising some research which we published in this week’s edition of Money Management, which you haven’t seen but I have, which is that whilst through the global financial crisis, and this period thereafter, financial planners have diversified their revenue streams, they have not overtly moved into mortgage broking.

I’m just wondering, if that research is accurate, whether that suggests that what we’re talking about here is a very nascent trend in that it’s really yet to get some minutia. So can I kick off by asking Lisa whether she believes it’s really early days yet for financial planners moving into the mortgage broking space, and vice-versa.

Lisa Claes, execeutive director, distribution, ING Direct: Yes. I think the word nascent may fit in terms of the migratory path from planning to broker, but I don’t think it’s something that’s going to be to extinguished. I think that it will develop over time.

But certainly, the migration from broking into planning is quite active and growing.

I think there are a lot of external and environmental factors as to why that’s happening, and structural underpinnings that would support that further migration, but I can speak most particularly about our own book because we have a financial planning channel and a broking channel.

And when I look, I pull out those that have accreditations independently and dually.

It’s a significant shift to have dual accreditation. And those books that have got dual accreditation have significantly more growth than the control set – than the stand-alone.

As to the structural reasons behind this: brokers now, because of the National Consumer Credit Protection Act (NCCP) credit legislation, are doing fact finders that are similar to what the planning industry does.

So it gives them a lot of information and opportunity to provide a more holistic service to their borrowers who, I might add, come to them in the early part of their financial life-cycle.

Generally people tend to borrow before they invest or even protect. So there’s significantly stronger flow from brokers now, on my perception, but I think with what’s happening legislatively regarding planners, they [planners] will be looking more and more, and those ripples will continue beyond the risk – it will continue to diversify, and potentially into mortgage broking as well.

Mike Taylor, Money Management: Peter, you are coming at it very much from the point of view of a planning background. I guess it’s always been an interesting question whether a planner wants to get into mortgage broking, and whether it should be part of their product service.

How do you see it?

Peter Ornsby, RI Advice: Yes. What we are finding is that most planners are seeing an opportunity to partner with a mortgage broker, or mortgage writer.

They are two fairly different skill sets. And where we see a lot of advisers focusing on advice, they’re looking to develop the skill sets of things like aged care, estate planning, and strategies for accumulators and so forth.

But they’re also looking to broaden their client opportunity and broaden their touch with like businesses, and that’s where I think that will continue.

So it is an opportunity to develop their business, develop their client base by partnering with mortgage companies, partnering with accounting firms, partnering with law firms.

And in that way, they actually have an opportunity to really put a fence around their client and to deliver a comprehensive model with people they trust.

So that trust piece is very, very important: that they are with people that they trust, that they know they’ll have a service delivered to their own standards. So I am surprised by what you say in terms of mortgage people are not broadening so vastly into the financial planning and vice versa.

Mike Taylor, Money Management: Tim, you actually come from somewhat of the inverse, because Vow Financial really has its roots in mortgage broking, and not unlike Yellow Brick Road, they’ve grown into financial planning. What was the thinking behind that?

Tim Brown, chief executive, Vow Financial: I think there were a couple of strategic reasons we pushed down this path.

One, as Peter has already indicated, is that we wanted to ring-fence our clients, and we were seeing the banks moving more and more into that space of selling general insurance and also life, risk, accident and sickness to our clients – and we thought that that’s an opportunity that we were missing.

And it made sense for us to move down that path. What we were also finding was that there were groups within our network that had already gone down that path and evolved from a mortgage broker and turned their business into a mortgage brokering and financial planning business.

So we’d already had what I call models for success. It was easier then to sit down and start talking to them, and talk about how they went down that journey, and work with brokers in our network who also wanted to go down that path. It was more recognition of an opportunity.

I think, getting back to Lisa’s point, a lot of the work is already done in the sense of the Statement of Advice: you know, when you’ve got 75 per cent of the information that’s really around the customer’s appetite to risk that you really need to cover off, that is when we introduce them to the financial planner and get that covered off. 

And it’s been a hard road. It really is a cultural change from mortgage broker – to go from selling a mono-line product – to actually start to think about other products that they can sell to their client.

But we are really pushing the NCCP aspects that they really need to understand, to make sure their clients have all their assets and also themselves covered for insurance.

Mike Taylor, Money Management: Well Vicki, you bring the legal aspect to it. And one of the controversial elements, certainly up until a couple of years ago, was always that mortgage brokers were never subject to the same level of scrutiny and oversight by the regulators as was the case with financial planners.

And there has always been that concern that mortgage brokers, rightly or wrongly, may have given advice when they shouldn’t have.

So I guess from the legal perspective I’m just wondering how you see the merging of the two roles, in the sense that they may be separate people giving advice, but now they’re ring-fencing, giving holistic advice.

I’m just wondering how you see the legal aspects of it.

Vicki Grey, Gadens Lawyers: I think that what you say is exactly right. Certainly a few years ago we had a situation where mortgage brokers really were viewed, I think, by the financial planning industry at least, as being rather unskilled, untrained, and a bit rogue.

Since July 2010, with the introduction of the NCCP, I think we have seen that this industry is now very much about compliance, in the same way that the financial planning industry is about compliance.

When Lisa talks about mortgage brokers moving into financial planning – I think we have seen that a lot since July 2010, because mortgage brokers have realised that now we do have the structures that Tim is talking about, we do have this fact find. We are 90 per cent of the way there, we can move over across into the financial advice path.

And perhaps, as Lisa also pointed out, financial planners have to be a bit more reticent about moving into the mortgage-ready path, because there is still that uncertainty about the legal requirements of being a financial adviser in the mortgage space, or mortgage broker if you want to call it that.

That still is somewhere where we’re understanding.

Although from the business perspective we are seeing a huge convergence of these two businesses, from a legal perspective the two laws are still actually quite different.

The thing that we find at Gadens is that certain parts of the legislation look exactly the same – the same words are used in both the Corporations Act as well as in the NCCP.

But we are noticing significant differences with the way that the two pieces of legislation have been interpreted.

So that is actually a bit of a challenge to the industry as far as understanding how that convergence can continue.

And certainly other things that we talk about in detail concerning different disclosure documents, and the timing of giving those disclosure documents under the two regimes, is certainly something from a practical perspective that the two industries are still grappling with.

Mike Taylor, Money Management: Okay. One of the things that I think occurs to everyone is that the remuneration standards across both sectors are different. I mean, commission is still very much a part of life in the mortgage broking space.

Commission is a dirty, dirty word at the moment and probably going forward in the financial planning space.

So I guess the question is, how do you handle dealing with clients at two separate levels?

One at a commission level, and the other level is definitely fee for service. And if you look at the latest ASIC briefing paper, even volume rebates are going to be very hard to sustain. So how do you homogenise all of that?

Vicki Grey, Gadens Lawyers: From a legal perspective, I think it’s quite interesting.

What we are seeing – and perhaps from a practical perspective others are far better qualified than me to comment – but what we are seeing a lot of in the legal area is that mortgage brokers are referring clients to financial planners in a partnership-type model, as Peter was talking about.

Because under that scenario, they don’t actually get into the conflicted remuneration space at all, because they are not making a recommendation.

They are just simply making a referral, and then the financial planner takes it and runs with it. 

A lot of models that we are seeing are actually doing that. That’s one way to legally very easily handle it, because you actually aren’t handling at all the issue of conflicted remuneration and other things that arise out of the legislation. 

So we are seeing a lot of that. But certainly I can understand from a practical perspective, particularly in a business like Tim’s, or in the bank where you are actually trying to balance across both, that there must be difficulties from a practical perspective in integrating that.

Mike Taylor, Money Management: Tim, is that true?

Tim Brown, Vow Financial: Yes. Well again, what we are trying to do is teach the broker to refer. We really don’t want them giving advice if they’re not qualified to give advice.

So what we have done is partnered with financial planners, but financial planners who came from a mortgage brokering background and who understand the client’s needs.

Because we find in the financial planning sector they tend to chase the clients who are more high net worth, whereas the poor old wealth accumulator tends to be ignored.

You know, smaller premiums are not as exciting in the sense of ongoing wealth strategy.

So our focus is really around covering their assets and making sure that they have sufficient life and risk in case they have an accident or sickness.

Our concern is really more around the property and what they’re buying at that point in time. We’re really not looking further than probably five or six years at that point. 

Mike Taylor, Money Management: So Peter, as I say, you’re looking at it from an advisory point of view. What do you see when you look at that environment?

Peter Ornsby, RI Advice: Look, when you talked about that fee-for-service versus commission argument, we are a big supporter for the fee-for-service and – absolutely – disclosure. In the mortgage environment you are still disclosing commissions as well. 

So I think transparency is not an issue. It’s how it’s positioned with the client. We have an example of advisers actually writing mortgage business, and they will dial down commission and charge a fee because that’s the way they’ve positioned their advice with the client.

The mortgage advice is just a component of the overarching comprehensive advice that’s being delivered. So you can deal with it that way.

Mike Taylor, Money Management: Lisa, what are you seeing from the ING Direct perspective?

Lisa Claes, ING Direct: Well, certainly our distribution in broker and planner is independent.

We don’t own any of our distributors. While we see the common sense reasons why models should converge, we’re certainly not telling people how they should run their business – I certainly share your respect for the legislation, the fee for service, and transparency.

That’s really one of our principle hallmarks here at the bank.

Interestingly, with brokers I am seeing, in a traditional and commission payment model, increasing instances of some of the significant, or emergently significant, players charging a fee for service, as well as collecting a commission.

And this can be both within the mono-line of the mortgage product, but with a view and the capacity to provide a more holistic advice.

So the question of fee-for-service in mortgage broking may be a portent for the future – irrespective of whether that broker provides more holistic advice, whether independently, or through partnerships, or co-brand, or co-location. So yes, I think it’s an interesting trend, but definitely one that is emerging for brokers.

Mike Taylor, Money Management: Tim, from a broker perspective: fee for service, do you see it as being something that would be embraced, given I guess I could have said the same about financial planning 10 years ago, but also given the degree to which commission is almost fundamental to mortgage brokers’ existence.

Can you see fee for service going in?

Tim Brown, Vow Financial: Yes. Look, I think fee for service will become part of the industry. And as you say, it’s probably like the financial planning industry.

We seem to follow a lot of their aspects – you know, legislation and now the changing from commission to fees.

And I think that will come in time into our space.

What sort of time frame? Who knows. But at this point in time we do see some variabilities of charging fees for service and rebating commissions in some cases, and that’s probably going to become more common over the next couple of years, I would suggest, as people want to differentiate themselves from people who just take a commission.

Mike Taylor, Money Management: An interesting thing happening as a result of the different financial advice arrangements, of course, is the vertical integration and the consolidation that’s been occurring, with the banks becoming quite dominant.

Is there a concern that putting all the pieces together around mortgages, around financial advice, and around all the things that the major banks can deliver, that in fact they stand to be dominant across all those spaces? 

You know, the very space we’re talking about – which is mortgage broking financial advice – is also an area that the banks are more than equipped to go in and dominate again.

So I guess my question is – is that going to be something we’re likely to see there as well?

And cheekily, I shall direct that to Lisa.

Lisa Claes, ING Direct: What, in terms of banks’ owning distribution?

Mike Taylor, Money Management: Yes, banks owning the distribution, and really having a footprint in all the spaces anyway.

Lisa Claes, ING Direct: Look, they’re already there. You know, in both the planning and the broker industry; they’re not identical in terms of their equity holdings.

But in spite of the protestations a few years ago that ‘we have never owned a distribution’, they’ve been very active in that space.

There is no end in sight in that trend. I think the question I have is whether the attempts by the legislation and the demand from consumerism for transparency and independence is enough to counter-weight that equity ownership.

I think there is something nice about independence, but I will also say that that independence can be managed within an equity ownership as well.

Mike Taylor, Money Management: Vicki, from a legal perspective, there is nothing in either piece of legislation, is there, that serves as an impediment to the banks becoming more and more dominant in the space if they choose it?

Vicki Grey, Gadens Lawyers: No, there’s certainly no impediment. And I think one of the things that we’re seeing is the sheer expense of complying with either piece of legislation. It makes it quite difficult for a smaller participant in the marketplace to keep up.

If you are a bank, you can presumably have better equipment to deal with the expenses of complying with both pieces of legislation.

If you are a relatively small aggregator, or worse still a relatively small mortgage broker or financial planner, that becomes almost prohibitively expensive at times.

Particularly when, dare I say, the efforts in this space are by law firms that charge like corporate law firms. 

They’re not your expert solicitor that charges perhaps like a suburban mortgage broker can afford, or a suburban financial planner can afford.

So that is a risk which will perhaps almost counteract the Government’s intention of perhaps making sure that we have transparency and independence.

Mike Taylor, Money Management: Tim, do you have any concerns about the scope for the banks to dominate that whole space?

Or are you comfortable with the relationship?

And I guess, too, in the mortgage space the banks have an interest in having as much reach into the market as they can manage.

But do you have a problem with that?

Tim Brown Vow Financial: We haven’t seen any change in relation to the aggregators where they have been owned by banks.

They still have a fairly independent lending panel. They give access to all product providers within reason.

Probably the piece that we have seen that is being restricted now is probably the mortgage managers, but they are also restricted in their own funding ability in the current climate anyway.

So we’ve found that that segment of the market is probably reduced and not as competitive as it used to be.

But certainly the regional banks and the state banks and the international banks are still very competitive in taking on the major four.

Never to the extent that we’d like to see. We’d like to see them much more competitive. 

I think that comes back to the Government probably making access to funding more available, and those credit ratings that the four majors qualify for being available to all, and not just to some.

And I think you could change the landscape a fair bit by doing that.

Mike Taylor, Money Management: Peter?

Peter Ornsby, RI Advice: Yes. We’re in a fortunate position. We’re owned by ANZ, but there is no requirement from a mortgage perspective to push.

So we have a relationship with an aggregator. Our goal is to deliver the best end result products through advice to clients and have that uncompromised.

So when it comes to especially the mortgage space, we are very, very flexible there, which is great. Now, we are quite young in that vertically integrated model. That may change down the track, I think time will tell. 

But right now we are very comfortable with the situation and the position, and it’s one we’ll maintain quite vigilantly.

Because I think a lot of the advisers are still very wary of operating in a vertically integrated model, and they don’t want to compromise their advice because of that. So we will hold that independence fairly aggressively.

Mike Taylor, Money Management: I think each of you has reflected upon the fact that it is not so much a financial planner who is also mortgage broking, or a mortgage broker who is also financial planning, but a coupling of the two in the sense that the mortgage broker brokes a mortgage, and the financial planner provides advice, and they are doing so at a different level.

Do you see the emergence of brokers who are going to be qualified to be planners?

And you know, I guess financial planners can broke mortgages now if they choose to, except that they’re going to put remuneration in question to deal with – and a new licence.

Do you see that occurring? I’ll start with you, Vicki, on that.

Vicki Grey, Gadens Lawyers: I think we’ve all started to see it more and more as we have major aggregators in the space.

I think if I was sitting there as a major aggregator I’d see absolutely no reason why I wouldn’t get an AFSL if I already had an ACL, or vice versa.

And I think then you will start to see the emergence of a person that can provide both financial advice and mortgage advice.

But I think that that’s still very much in its infancy. I think at the moment people are still basically referring across the two streams. But yes, I confidently see that that will be a likely outcome. 

Mike Taylor, Money Management: Tim, from your point of view?

Tim Brown, Vow Financial: Yes. Look, it’s an interesting question that we pose to our brokers in a number of surveys and focus groups.

And we found that there was probably about 10 per cent of the network that actually wanted to go to the full financial planning, and we still haven’t seen a lot of evidence of that.

We’ve seen maybe a dusting of a very, very small group that moved across that way. I think it’s a very special person that can do both properly.

And I think often what we have seen where someone has done it, is their mortgage business has suffered while they’ve moved into financial planning, and vice versa. 

So I think what we will probably continue to see is this referral relationship, with an in-house financial planning firm that supports their clientele.

The biggest concern for us was if we refer the client to a financial planner, will that client come to us for a mortgage.

And they’re the guarantees that we have given our broker network, and that seems to be their biggest concern – and that the person is suitably qualified and has a reasonable personality.

So if you can get all that, then you’ve got a successful model.

Mike Taylor, Money Management: Peter?

Peter Ornsby, RI Advice: We’re a business consisting of lots of small businesses, one- and two-man bands and they won’t have that capability.

But if you’ve got a business with five or six advisors that can operate in a corporatised environment where you can have a specialist in the mortgage field, a client comes in, they can speak to a risk specialist within the business.

So if the business has the capability, then the opportunity will be there. But there are not a lot of businesses of five, six, seven planners, and I think the small businesses, the one, two-man bands – which is a lot of the industry – will find it very different to actually provide both.

Mike Taylor, Money Management: One of the interesting developments a couple of years ago was Count Financial – before the Commonwealth Bank decided it would like to own it and it made Barry very, very rich – before that they actually had quite a solid shareholding in Mortgage Choice, I think it was.

Do you think that there is still scope for major dealer groups to buy stakes in mortgage broking concerns, or do you think that it’s really more going to be a cooperative arrangement?

And I’ll start with you for the moment, Tim.

Tim Brown, Vow Financial: Yes. Look, we’ve had discussions with a number of financial planning groups, and I think generally at this point in time, with the models where we’ve seen mortgage brokering set up in financial planning groups, their penetration is very low.

I can think of two or three where currently, if you look at the number of planners they have versus the number of mortgages they write, it’s a very small percentage of their overall business.

And I’m not sure what’s the reason – and I think that’s probably partly what we were talking about before, just that capability of someone to adopt a mortgage broker in a small practice, and then look after them and make them part of the practice.

I think compliance costs, which I think Vicki alluded to earlier on, are affecting not only the financial planning industry but the mortgage broking industry as well, and they’re finding that the administration to comply is killing them. It’s slowing down their business to a point where now they have to bring on sales support. 

So all of a sudden we’re seeing these offices starting to consolidate – you know, brokers banding together. I think that’s the opportunity where we might see financial planning grow at a much faster rate.

Potentially, maybe, that then links through to a financial planning group (like we do with consulting) who might go, ‘we’d like the growth of this, we might absorb this into our business’.

I’m not saying that we’ve had that conversation, but you know, it would become a factor in time, I’d suggest. 

Mike Taylor, Money Management: Peter?

Peter Ornsby, RI Advice: I see the opportunity developing around the strategic alliances. I think a lot of clients that go see a financial planner actually don’t have mortgages on their mind.

They’re thinking about their investments and so forth. And I think long term there’s a great opportunity for larger firms to broaden their client value proposition, and their opportunity of gaining new clients through a partnership with a larger specialist organisation.