I use the word ‘system’ a great deal, particularly in reference to marketing, but it is relevant to everything your business does. In fact, your business is a system, and I have a series of posts dedicated to this topic.
In my systems view, people will act as required to succeed in the system that they find themselves in. For us, we are in the system of Mortgage Broking where our incentive is that we are paid moderately varying commissions for organising loans. The range of variation in this commission for mainstream lenders is probably in the order of 10% to 20%. Additionally, we understand that a client during their lifetime may do many loans, buying their first home, refinancing, renovating, buying a new home, investing, etc. Finally, as with most small businesses, Mortgage Brokers do not have a large advertising budget with which to attract new clients so rely heavily on referrals and maintaining a good reputation.
In this system of Mortgage Broking we are competing for clients who have four main options that they are free to choose from — go to any Broker, go to their current bank, research and organise their loan themselves, or decide it’s all too hard and do nothing. Further if a client freely chooses later to change their loan or lender within the next year or two, we will lose all or part of the commission paid to us (i.e., a clawback).
Therefore, a rational Broker trying to create a profitable business has two choices:
- Convince clients to take the loans that pay them the highest commissions irrespective of the rate to the client.
- Get the best loan you can for a client irrespective of commissions.
With the first choice you may achieve a result of earning around 20% or so more from each transaction. The downside for you is that you are more likely to get clawbacks as your clients become aware that they were deceived and better loans were available to them. This is particularly the case where early repayment penalties no longer exist and in a marketplace of heavy advertising of home loans. Of course, this assumes that there is a positive correlation between high commissions and more expensive loans to the client, which is arguable. In reality, unlike many businesses, Mortgage Broking is not one where the more I charge the customer the more I get paid.
You are also unlikely to receive repeat or referral business from those clients so you have much higher marketing costs per client. You are also likely to have a lower rate of converting inquiries to clients as you are relying on an uninformed or naive market.
The first choice relies heavily on being able to ‘sell’ people and convince them of things that are not true, whilst hoping they are not, or do not become, aware of the better options which are heavily advertised in our competitive marketplace. And when clients do pull out you have done all the application work for no result.
So it seems to me that the extra 20% or so you might earn is quickly overtaken by a combination of:
- lower rates of loans settling as clients pull out more often
- higher clawbacks
- lower repeat business
- lower referral business
I know from seeing in practice that Brokers who take the second path of getting their clients the best loan irrespective of commissions are far more financially successful, both in the short term and the long term. They have a higher rate of taking applications from clients at appointments, higher settlement rate for their applications, lower clawbacks, more repeat and referral business. And they don’t have to ‘sell’ anyone and can have a clear conscience.