Who are the power players of the mortgage advice industry?

Sunday, 16 June 2024

New home loans worth $65 billion were written by banks in the year to April 30, and mortgage advisers were responsible for more than half of those.

Mortgage “advisers” is the term the industry prefers, seeking to end the use of the term “brokers”, which they no longer feels represents what they do.

But frequently, the word “broker” is the one that rolls off industry bigwigs’ tongues, despite the effort to use the “a” word.

The industry has been on the up as banks have shut branches, and withdrawn mobile mortgage managers, leaving the public with a far more distant relationship with their banks than ever before.

Just a decade ago, only about a third of new home loans for owner-occupiers were sourced by borrowers through mortgage advisers, the Commerce Commission noted in its draft report on competition in the retail banking market.

It is now about two-thirds, and the commission has come to see them as a force for increasing competition in the home loan market, which is dominated by the big four Australian banks, though Kiwibank is proving to be a rising power in the adviser channel, advisers say.

Nicole Ferguson, national manager of the giant Loan Market franchise group, says in Australia, where the same big four banks rule, mortgage brokers account for 70% of new home loans.

John Bolton, founder of Squirrel Mortgages, says around 55% of all mortgages (investor mortgages included) are arranged by advisers now, which would equate to about $35b of home loans in a year.

The mortgage advice industry is characterised by a huge number of small, owner-operated businesses, but it has also produced a small number of powerful mega adviser-brands.

Squirrel Mortgages

Former ANZ banker Bolton founded Squirrel 16 years ago, and has grown it into one of the few large, well-known brands in the mortgage advice industry.

He says the way advisers are paid with larger up-front commissions based on the size of loans they place with lenders, and smaller ongoing “trail” commissions being paid by only about half of lenders, makes it hard to build businesses with stable and predictable incomes.

Bad years in the housing market lead to lean times for mortgage advisers.

It is one of the reasons why there are only a few really large mortgage advice brands, and many, many smaller businesses. These are the “the rats and mice” of the industry, although successful independents can earn decent incomes.

“It’s too hard to scale in this business because it’s too hard to make money,” Bolton says.

“I’ve been going 16 years now, and I paid my first dividend this year,” he says. “I paid a couple of bills and the rest went to the bank.”

Squirrel Mortgages is what Bolton calls a “true company”, which employs advisers itself, and it has grown to be a power.

“We write between $2.5b and $3b a year,“ he says.

New Zealand Home Loans

Kip Hanna, chief executive of New Zealand Home Loans, says “We are mortgage advisers”, but its 170 advisers operate more like financial coaches.

Instead, the lure for clients of NZ Home Loans is that if they take its advisers’ advice, they can end up repaying their home loans early, saving years, and tens of thousands of dollars in interest.

While the Commerce Commission is interested in mortgage advisers facilitating competition to bring the price of bank home loans down, Hanna sees NZ Home Loans as bringing a different kind of competition.

“Competition is a much broader concept, the way we view it,“ Hanna says.

But NZ Home Loans, which was founded in 1996, is a sister company to Kiwibank.

It is owned by Kiwi Group Capital, which owns Kiwibank, and when it wins new clients, it typically refinances them from their existing banks to either Kiwibank or ASB.

But Hanna says it has a large and growing business working with people aiming to buy their first homes, so not all its work is refinancing loans.

It earns its money like the rest of the industry paid by commission, both upfront and trail on home loans, but also from selling insurance.

“Our view is that model is the right model for New Zealand,” he says.

The adviser industry is concerned whenever periodic discussions arise around the conflicts of interest commissions bring.

“The amount of advice people received on home loans and insurance is really, really low,“ Hanna says.

Shifting to user-pays fees would result in fewer people seeking advice, but he was sympathetic to arguments that upfront commission should be lower, and trail commission higher.

That would produce higher ongoing incomes for advisers to service their clients.

NZ Home Loans has 170 advisers, and in a “standard year”, it would do about $2b in lending , but there have not been many standard years lately, he says.

“It is significant. We have an underlying mortgage loan book that is bigger than some of the small banks in New Zealand.”

Loan Market

Ferguson has been national director for the franchise business Loan Market in New Zealand for five weeks.

It is a big player in the mortgage advice market with 179 advisers working in about 130 individually-owned franchise businesses operating under the Loan Market brand.

Each year, its advisers do between $2b and $4b of new loans, but recent years have seen that number bounce about, Ferguson says.

“Customers have been hit pretty hard with living expenses,” she says.

But the value of new loans may be understating the power of the group, as Loan Market’s own website puts the figure at over $350m in home finance each month in New Zealand, which would add up to at least $4.2b.

“They would be bigger than us, around $3.5b to $5b across a large number of small businesses,” Bolton says.

Despite that, the financial statements of The Wealth Market, the majority owner of the Loan Market operation in New Zealand, recorded $260m in lender payments to advisers in the year to the end of June last year up from just under $228m the previous year.

Loan Market is nearing its 30th anniversary, Ferguson says. It was set up by Sam White, the great, great grandson of real estate entrepreneur Ray White.

The group spans Australia and New Zealand, and has over 6000 advisers working under its brand.

Like Hanna, she would like to see a shift in commissions to pay brokers a higher trail to build more stable businesses where advisers were effectively paid for the work they did looking after clients in the years after they secure loans for them.

Mike Pero Mortgages

The business has 80 mortgage advisers working under franchise arrangements, says Aaron Skilton, its chief executive.

It is part of the Mike Pero Group, which is in turn owned by the Australian Liberty Financial Group, and Skilton says it writes “more than” $1b of mortgages a year.

Mike Pero Group recorded $39m in fees and commissions received in the year to June 30, which included both mortgage and insurance commissions.

That was down from just under $50m on the same period the previous year.

Mortgage Link

Last year, the group that owns NZ Home Loans bought Link Financial Group, which owns the Mortgage Link brand, which has 180 advisers, says Hanna.

When that is added to NZ Home Loans operation, it makes for a powerful group.

“Our group would write $4b to $5b in a standard year,” Hanna says.

“It would be one of the biggest New Zealand-owned groups.”

Unlike NZ Home Loans, the Mortgage Link advisers recommend loans from “a full panel” of lenders.

Mortgage advisers ink deals with different lenders building these panels, allowing them to source loans from as many lenders as they can, although the Commerce Commission is not convinced that all advisers do a particularly good job in telling their clients about the limits of their services.

It thinks advisers should be providing clients with a list of the lenders they do not deal with.

The aggregators

The many smaller mortgage adviser businesses rely on a group of businesses that are not well-known to the public – aggregators.

Aggregators like New Zealand Financial Services Group (NZFSC) and Kiwi Adviser Network provide services to individual advice businesses advising on mortgages, investments and insurance.

The largest, NZFSC, is majority-owned by The Wealth Market, which owns the Loan Market business.

Its chief executive Baden Martin says the aggregators help advise businesses by doing things like providing them with IT, meeting their legal requirements, and keeping themselves up-to-date on their professional development,

They also help businesses in their relationships with lenders like banks, collecting commission for them, and paying it on.

For all this, advice businesses pay aggregators a fee.

“Five aggregator groups would account for 92% of mortgage advice,” Martin says.

The others are Link Financial Group (owned by Kiwibank owner Kiwi Group Capital), Newpark Home Loans, and Mike Pero Mortgages.

There have been recent estimations in New Zealand and Australia for how much mortgage advisers make, says Bolton.

There’s no doubt top advisers can make a tidy packet, but all estimates have been wide of the mark, Bolton says. That is because they have failed to take into account the cost of running businesses.

“There are massive costs in these businesses,” he says.

Staff, aggregator fees, office rental, professional indemnity insurance, and tax all take a bite out of the commissions mortgage advisers get.

Upfront commissions range from 0.55% to as high as 1.5% of the loan, and trail commission is around 0.2% a year.

On $35b of home loans arranged in a year, assuming 0.8% commission on average, that would be total upfront commission income for the industry of $280m, although that did not include trail commission.

And with trails so low, a lot of their work they effectively do for free, Bolton says.