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Setting up a financial services arm

publication date: Sep 15, 2006
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author/source: Jessie Hewitson
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Setting up a financial services arm can boost your profits, speed up sales and help sell more houses. It’s a predictable income stream too, as even in a slow market there is money to be made from clients who are remortgaging their properties.

At the most basic level, an estate agency may have a fairly casual arrangement with a mortgage broker or an independent financial advisor (IFA), to whom they refer all their customers’ mortgage business. In return, the agent will see an introducer fee or cut of the commission. The other alternative is to have a more formal relationship with an IFA. Charcol, for example, deals with the financial advice for London-based estate agency Winkworth and offers an ongoing business relationship, weekly progress reports on their leads and a share of the commission, usually amounting to around £250 or £300 per case.

Separate source of income

“Sometimes we put an advisor in the branch, but more often than not we have an advisor who covers a range of branches – they come in as and when required” explains Drew Wotherspoon, head of communications for Charcol. “The benefit of having us there is that it creates a separate source of income, plus it adds to your service. By having an ongoing relationship with Charcol we will speed up the process and keep you informed. It is then much easier for the agent to manage and track the whole process and better for their clients, as they know what is going on.”

Charcol also offer extra products – including unique buy-to-let mortgages, which, it claims, helps negotiators with their sales. As Wotherspoon adds, another big benefit of using Charcol is that it handles the mountain of red tape and compliance issues that is involved in selling financial products: “By using Charcol, the agency is not liable, meaning you do not take on the risk, or need to be regulated by the FSA.”

Non-compliance

Non-compliance is a very serious business indeed, which can result in heavy fines and, in the worst cases, imprisonment. You can expect the FSA to publicise your case too, obviously affecting your reputation deeply. Your responsibilities under the FSA will depend on the way you have set up your business. Robin Gordon-Walker, a spokesperson for the FSA, explains: “If you are simply passing on leads to a broker, providing they are not employed by your business, you would be an introducer and not subject to our regulatory requirements. However, if your business is offering advice, whether in its own right or as an appointed representative of another organisation, then you will be subject to FSA rules.”

Another option is to use a franchised financial advisor service. This offers greater control still, and can also remove some of this regulatory hassle. Peter Brodnicki, of the Mortgage Advice Bureau, a financial services franchise provider, offers a way of setting up an in-house advisor and his company helps navigate the regulations set down by the FSA. Brodnicki estimates that 80% of smaller independent firms introduce their clients to a mortgage broker (some are too small to employ someone full time; some don’t want the hassle), and only 15% of businesses employ their own advisors. He hopes that this last figure will increase as people realise the benefits of offering an in-house service.

The obvious advantage of employing your own advisor is the increased control and money it provides. “On the introducer side, I don’t think there are many agents out there making much money. You may have agents earning a few hundred pounds a month, but there is little management or marketing support. Selling financial services – such as mortgage and conveyancing – is mostly an afterthought in estate agencies. People think it takes lots of effort with little return.”

Financial advisors

Top financial advisors, according to Brodnicki, earn in the region of £150,000 - £200,000 a year, of which your agency’s target profit should be 40% of this, so it’s a sizeable amount. For the first year it is reasonable to expect the advisor to make £100,000; a top-of-their game advisor can make as much as £300,000. And to give some indication of the size your agency needs to be to justify an in-house mortgage advisor, Brodnicki suggests that you should be securing 20-25 agreed sales a month, with 15 of these reaching completion. This would be ale to support one advisor; if you are three branches selling 40-50 houses a month then you will have scope for two advisors.

Time and commitment

“People either do it very well or very loosely. Like anything else, it takes time and commitment to do well. The big problem is generating appointments for your advisors: negotiators don’t want to jeopardise new instructions and they aren’t comfortable discussing mortgages.” He adds: “We will help to set it up: we will recruit the advisor, handle the compliance and do the PR and marketing. To get it right it takes a lot of resource and time, which we provide. There is no easy solution to selling mortgages in estate agency – you have to change the culture. Staff have to believe in a mortgage as well as an estate agency service and there needs to be a commitment from the business owner to drive business”.

Training also includes ensuring the advisor is compliant and educating the sales negotiators so they can identify and clearly explain financial advice leads. Whether it is through Charcol, or a franchise such as the Mortgage Advice Bureau, having the backing of a larger group also helps boost your profile with the lenders, giving access to exclusive deals and higher procuration fees.

Mortgage Advice Bureau

Mostly, the Mortgage Advice Bureau does not charge a set up fee (though if the business is starting from scratch, there may be a one-off charge of £3,000) and thereafter it is a percentage of net rate pay, which varies between 10% and 20%, depending on how much business you do.

Simon Hughes, of London-based Charles Conran estate agency, decided not to work with operations such as Charcol and the Mortgage Advice Bureau. Instead he went it alone, braving the regulation and compliance issues; he is directly regulated by the FSA. The reason why he chose not to use a franchise is that he felt he could make more money without one. “As I understand it, the way franchises often work is the advisor gets 30%, the company gets 30% and the rest goes to the franchise. We, on the other hand, get 100%. Also we find that we have complete control over our staff – we can put pressure on them to highlight that side of the business to our clients, where a third party advisor wouldn’t have the same influence.”

He adds: “Working in the same company means you are all pulling in the same direction. Plus, there is a quality control issue - we can control training and make sure our clients are dealt with honestly and with integrity. We do not run the risk of a third party financial advisor doing something that reflects badly on our business.”

Whichever route you choose to take, selling mortgages can only be a good thing, adding to your income and service to customers. Last word goes to Brodnicki who says: “Every agency has the potential to do loads more than it is doing in my opinion. There are lots of opportunities at the moment that are going unrealised. It is not particularly complicated, but you do have to be focused to do it well.”