Last year will be remembered for many things, but for a significant number of advisory firms, it was the year when their priorities changed fundamentally. Before the financial crisis, many owners of mortgage intermediary businesses may well have been eyeing their exit from the market, buoyed by a steady stream of business throughout the boom years, confident of achieving their ambitions. But with those heady days well and truly behind us, many of these businesses must now refocus, both in terms of the future direction they choose to take and where this might lead them as they look at their future exit strategy.
The first important point to make is that it is never too early to plan an exit strategy. The sooner the planning starts, the greater the chance of securing maximum value, yet it is still surprising how low a priority this can be for many businesses. Company owners must be clear about what they want to gain from their exit and what shape their business needs to be in before they can move on.
In the good old days, firms might have thought that the transactional income they brought in was enough to make the business appealing, and one which would deliver a healthy sum for the owner when they decided to take their leave. More than ever, it will be obvious to all company directors that a practice merely based on transactional income is not going to be as attractive as one with built-in recurring income.
The times are a-changing
The time to make significant changes to the business in order to achieve the exit plan is now. Historically, of course, intermediary firms have not been over-enthusiastic about moving to a model based on recurring income.
Indeed, during the 1990s, many firms chose to move in exactly the opposite direction, feeling the pressure of regulatory responsibilities, increased costs and market difficulties. For example, there were a large number of IFA firms that looked at the declining consumer popularity of pensions and the demise of with-profits, together with increased regulatory requirements, and decided not to operate within the full advisory range anymore. Instead, they chose to focus on the growing and more profitable mortgage and general insurance (GI) sectors.
That decision may have paid dividends for a short timespan, however, there are now some clear disadvantages for the firms that opted for that particular route. One of those, which firms working exclusively in the mortgage sector are now grappling with is that their ability to earn recurring income is particularly limited. Lending products do not pay renewal commission, and brokers are only too well aware of the fight that can exist between them and lenders to keep the client at the end of the deal.
The whole issue of client retention for intermediaries has also not been helped by the nature of sales interactions, particularly in the mortgage market. Here again, these have tended to be transactional in nature – one-offs, never to be repeated – rather than continuing, multi-product, client-relationship focused. Again, in the boom time, the lack of focus on client retention did not seem too problematic: if a mortgage broker lost a client a couple of years after giving them the original advice, there was always a new client coming through the door to take their place.
This is certainly not the case any more – indeed, it has been the lenders who have been most active in terms of retention activity. The great debate around client ownership is irrelevant if only one side is maintaining the client relationship.
The better intermediaries acknowledge the need for constant client contact; however, it has been the lenders who have been most adept at keeping the client on board while sidelining the original adviser.
Finders keepers
Of course, most mortgage intermediary firms have already been involved in sectors which provide recurring income – life and general insurance. While this might be the case, these products have often been treated as ‘nice to have’ by the mortgage intermediary community, rather than important cross-sale opportunities which need considerable resource and work.
Firms that have taken their clients’ GI and life needs seriously will be in a far stronger position than those who were merely happy to sell the mortgage and move on to the next customer. Cross-sales not only generate attractive recurring revenue but they also help cement a broader and longer-term client relationship.
In effect, the firm should have been working hard to make themselves a one-stop shop for their client – why would they go to another adviser down the street, when they can get everything they need in one place? If this has not been a priority for the business over the last decade, then changes must be made. The recent Crosby Review highlighted the potential for many mortgage brokers to be out of business over the next couple of years – not quite the exit that many owners would have envisaged for themselves.
This is a very real threat and one which requires corrective action. Some firms may feel that to change business processes at this time is too costly and does not guarantee success. However, to do nothing is the riskier option – indeed, shaping the business to make the most of the changing environment need not be prohibitive from a cost perspective.
Being involved in any business is often all-consuming, and some owners can be accused of not seeing the wood for the trees. A focus on cost and income is obvious, but solutions to limit cost growth, or even to reduce it, are not always that easy to see from the inside of a business. Today’s business and regulatory world often requires the owner to be a jack-of-all-trades, but outsourcing some aspects of work, such as compliance, can not only save money but also allow the management to focus on growing their business.
Even modest changes in practice can open the door to new income streams as well as save costs. In addition a business that manages processes on a modern, appropriate back-office system for example, is more attractive to a buyer than one that is not.
While an exit strategy should be built into every company’s business plan, owners can get distracted in the planning. There needs to be clear thought about what the exit plan should provide and the shape the business needs to be in to deliver the value needed. Flexibility is key – as we have seen, the landscape has changed dramatically, and what may once have seemed set in stone is no longer achievable. Companies may therefore need to look again at their processes, their position within the market and the help that is available to get them to where they wish to be.
For many, exiting the business is not a short-term project. Work put in place now will certainly make the transition that much easier and ultimately much more profitable. n
Bob Hunt is chief executive of Paradigm Mortgage Services
