The Canadian mortgage industry has evolved over the past several decades to the point where independent mortgage brokers play a dominant role across the country. While it can be argued that the big banks still hold the lions share of the market, the growth of the mortgage broker industry and the benefits to consumers is undeniable.
Mortgage brokers provide the consumer with a valuable insight into the products and services available in Canada when seeking home financing. A skilled broker will structure a mortgage for their client that supports their financial and home ownership goals both short and long term. If a broker does the job well, that client will not only come back to them in the future, but will refer others who are in need of mortgage advice. Brokers will also establish referral relationships with Real Estate professionals and other service providers to garner business. This is again based on the broker providing a high level of service to ensure repeat business.
Throughout their career the broker will work hard to build the relationships they need to sustain their livelihood. These then transcend the brand that the broker is working with as the relationships tend to be highly personal due to the nature of the role. Brokers work with highly sensitive information and there must be an earned trust that is maintained. That means that the client is dealing with "Bob" the broker, and no matter where "Bob" may hang his hat, his customers will follow.
Let's take a step back and look at the industry more broadly. In Canada there are several different brands, as well as a large number of smaller independent companies. For the most part the large brands operate on a franchise model and they compete heavily for growth amongst each other. In recent years that has also resulted in a massive consolidation of the industry with the acquisition of companies by a couple of major groups. The result is that there appears to be, at first glance, about 13 different national brands in Canada. With the consolidation that has occurred however that number is actually closer to six. I say that because with consolidation, eventually there becomes a merging of business systems, technology, and in some cases even brand due to the costs associated with managing several different brands that are wholly independent.
Back to the mortgage brokers. This intense competition means that all of the different brands compete for the broker to work at their company. As the vast majority of mortgage brokers are independent contractors that means that they can move from brand to brand, and their customers go with them. Remember, the loyalty of the customer is to "Bob" the broker, not the brand he is associated with at any given time.
This arrangement suits the mortgage broker very well as it gives them a much higher level of income security. It also allows them to function as a self employed individual and exercise a greater amount of control over their business. The broker has the opportunity to earn a good income that affords them a comfortable lifestyle as they build their business.
If we also now factor in the brands, and their franchises, we need to consider how a franchise owner derives their income. When they recruit a mortgage agent they are compensated based on earning a share of the commission the agent earns on a mortgage as paid by the lender. In Canada the average split, including the royalty owing to the brand, is 15% to the franchisee, or fifteen cents on the dollar. The average royalty in Canada is 5%, so that leaves 10% to the franchise owner as gross revenue to run their business. Some will also charge desk fees, or other ancillary charges to try to make up for the smaller split they earn, but these charges when added up rarely come to a total of more than 5% of the brokers earnings. So if we use these averages, that means that the franchise owner is earning the original fifteen cents on the dollar.
That is a pretty small margin, and with the average mortgage broker in Canada earning about $50,000 per year that means that the annual earnings for a franchise owner are relatively light. The result is that most franchise owners also build and maintain their own client portfolio to be able to drive their own personal income. Like their brokers, their clients are loyal to them as individuals, and not the brand or office that they are a part of.
While this pervasive model does an excellent job of allowing brokers to build and sustain an income, it can present a challenge when a mortgage professional is seeking to either retire, or exit the industry. The question becomes, how do you build tangible equity in your business in this industry?
Commonly most brokers believe that they will be able to sell their book of business, and in the case of a franchise or brokerage owner, the ability to sell the business. The challenge is that the valuation of an individual's book of business and also the ability to value the brokerage (franchise).
Looking at how to value an individual book of business is difficult because by nature the exit of the broker will result in a significant run off of clients. These customers have an established level of trust built over time and that is not easily transferable to someone that is new. This is true no matter if the broker is an independent contractor of a brokerage, or the brokerage owner. The overarching experience of anyone that purchases another's database is that there is typically a run off of clients of 80% or more. This is further compounded by the legal relationship between the broker and their client. Most clients object rather strongly to having their personal information sold, particularly to an unknown person or entity, and client confidentiality protects the consumer against such actions unless expressly defined in a contractual agreement.
Some mortgage professionals find a solution through bringing a successor onboard to assist with the business. While this can be somewhat successful, it still greatly limits the value of the client database again given the nature of the client / broker relationship and the extended time needed for a new broker to establish the same level of trust with the customer.
With the brokerage itself, the income derived by the owner for their own client list needs to be treated the same as for other brokers. That leaves only the income that the brokerage itself earns, generally comprised mainly from the split on commissions with brokers. Additionally there is no guarantee that the brokers, who are independent contractors, will stay with the brokerage once a sale has been completed. New owners do often mean change to culture, policy, and procedures resulting in brokers leaving.
Typical business valuations are completed based on a multiplier of the Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA). Multipliers common to financial services are three (3) to five (5) times EBITDA. Knowing how low the margins are, and the complexities surrounding the client relationship, this does not provide for a strong equity position that can be counted on for retirement. When the business is a franchise, the brand owner will often claim that by belonging to their network you are building equity in your business. This is true to some extent, however to sell a franchised location your buyer needs to be approved by the franchisor. Add in the regulatory environment at play in the mortgage industry and your options to sell you business become far more restrictive, even if you are highly profitable.
The mortgage professional, like many other self employed people, relies heavily on conventional retirement savings instruments like RRSP's, stocks, bonds, and other investment vehicles including investment properties. The reality is that while there are a large number of people that succeed with the above, there are many that end up working well into what they hoped would be their retirement years. This is of course not an position that anyone hopes to be in, especially after spending most of their life working to build a future for themselves and their family.
The major brands, like many franchise based organizations, do not have a business model that can provide a tangible solution for the members of their networks. Pensions can be very expensive, complex to administer and when the majority of your network is self employed contractors, nearly impossible to even get started given that there is no employer / employee relationship.
Until very recently there has been no program designed specifically for mortgage brokers and franchisees to help facilitate retirement.
Haystax however has created a solution and is the first company in the country that has introduced a retirement solutions program for independent mortgage professionals and their franchise owners. Known as the EXIT Retirement Solutions program, it recognizes the hard work and commitment put into building a business, and gives Canadian mortgage professionals a way to build tangible, guaranteed, value in their business.
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