This week I start looking at the importance of network size, financial stability and culture.
In theory, the larger the network, the more economies of scale kick in and the stronger its negotiating power with mortgage lenders and insurance companies.
In practice, however, economies of scale or productivity issues can turn out to be a bell-shaped rather than a straight line graph. Instead of ARs seeing decreasing charges per head the costs start to creep up – ask any DBS member that has been with the organisation since the late 1980s.
All networks must implement and operate compliance processes and monitoring, marketing for ARs, a training and competence regime and a host of other administrative issues. These requirements mean costs that may prove an intolerable burden for small organisations with, say, under 200 ARs.
As the costs must be paid for by the ARs, trying to spread it amongst a small number of ARs is self-defeating. Some will leave because of the high charges – which will leave even fewer ARs to pick up the tab, a decreasing spiral that ends in oblivion.
Medium-sized organisations with between 200 and 500 ARs, should be able to achieve a critical mass that will allow them to operate in a profitable manner.
For larger organisations with over 500 ARs there is the danger of tiers of middle management dissipating the efficiency that might have existed during the growth of the network.
The larger organisations that exist today are the IFA networks and life company tied agency sales forces that have evolved over through the stages described above.
Many have also been through a number of name changes – Hambro Life evolved into Allied Dunbar, now called the Zurich Adviser Network, with another name change in the pipeline as ZAN is separated from its Zurich parent, possibly through a stock market flotation. Sesame is an amalgamation of five IFA networks including DBS. All these changes cost a great deal of money and add to the financial burden of the ARs.
Most of the new mortgage networks face this challenging growth curve, although Network Data has been through the pain barrier and has over 800 brokers that currently operate under its single MCCB number. Of these, around 500 are expected to upgrade to AR status with a further 500 ARs joining before October 31, giving a total of over 1,000.
Mortgage Intelligence has the advantage of a large parent company, Close Brothers, funding the working capital requirement and hence providing financial stability.
You can also be reasonably confident about the finances of other corporately-owned networks such as Pink Home Loans and Enable (both wholly-owned subsidiaries of Skipton) and Genesis (owned by Mortgages PLC).
The other 40 or so networks – many of them mortgage packagers in origin – are a different proposition indeed, with their financial standing being hard to evaluate.
All networks have an expected turnover in excess of £1m which can be achieved with as few as 25 ARs, and all must have submitted a three-year business plan to the FSA as part of their application process.
The plan should show how many ARs they expect to have by October 31. As a broker, put the question to them – how many ARs have you signed up and how many do you expect to have in the network come October 31?
How they react to your question could be more important than the numbers they come up with.
Next week I will continue this look at network size – does it automatically mean higher procuration fees and financial stability? And what are the culture and service standards that you should expect?
Key features of a network
(Dates subjects covered on this page in brackets)
Mortgages – product range and procuration fees (May 24)
The lender panel and product range should be large enough to ensure that you are able to select the best products for clients.
Insurance – product range and commissions (May 31)
You should have access to a good range of products from well-known names that are easy to sell to your clients.
Point-of-sale quotation system (June 7)
Essential in order to search over whole of market, to provide best advice and to produce FSA-prescribed documents.
Network membership fees (June 14)
What do you get for your money?
Network size, financial standing and culture (June 21)
Look for a proven record, stability, and strength through size.
Service standards (June 28)
Fast and efficient processing of administrative issues including mortgage packaging and the prompt payment of fees owing to you.
Compliance monitoring (July 5)
Should be conducted in an efficient manner which causes you minimum business disruption.
Professional indemnity insurance (July 12)
Mandatory under the FSA rules, but who pays?
Training and competence (July 19)
Are you provided with training and help with exams?
Exit strategy (July 26)
If you decide to leave your principal firm the break-up should be as painless as possible.