The Final Word on Paying Referral Fees
A lot has been said about the subject of whether or not mortgage brokers should pay referral fees and I have heard most of it since commencing my broking career with Ray White Financial Services (now called Loan Market) in 1994.
The argument that new brokers should not pay referral fees in my opinion is like arguing infant children should not be vaccinated. Sure it is possible to grow a healthy broking business without paying referral fees and many have, however running a business is a numbers game, much like life (and indeed much like vaccination). There will always be people who argue the opposite or choose to in many cases, despite facts and a mountain of evidence to the contrary. The scary things is social media has given these people a voice. We need to be very careful who we listen to and who we take advice from though.
We need to be very careful who we listen to and who we take advice from though.
I'm not suggesting the anti-referral-fee-paying lobby are as irrational as the anti-vaccinators, however their 'light' arguments do fly in the face of the facts and the evidence that I have seen over the past 22 years.
Cash flow is the lifeblood of every new business. Many new businesses are undercapitalized from the start, so they need to find innovative ways to market themselves with limited capital. Even if they do raise a little capital from family, friends or investors they still need to get the biggest bang for their buck.
We need to get the phones ringing and our inbox's humming with finance enquiries to get the cash flowing.
Imagine if I told you, that you could advertise on the radio or TV and only pay for the advertising if it worked. Yep I'm dreaming! The radio advertising reps answer to an advertising flop is to spend more money for another three months right? Online advertising also needs to be paid upfront, again with no guarantee of success.
The truly beautiful thing about paid referrals is it's one of the few marketing strategies available where the supplier is paid on success.
A good friend of mine Philip Edwards who runs a very successful Sydney based brokerage in partnership with another good friend of mine Stewart Noble, commenced in broking in 2007. Phil is one of many, many examples of brokers I have worked with who have built mega successful broking businesses through paying referrers. Phil tells me he still has paid referral partnerships in place with 18 businesses (mainly real estate offices) today. He used to have more referrers, however has handed off some to his sales team as Phil couldn't service all the leads he was generating.
Phil couldn't service all the leads he was generating.
Phil has a likeable, infectious personality and brought with him a tremendous amount of determination when he commenced broking in 2007. Phil is an excellent communicator and a super salesperson. He's the type of guy who can get past the receptionist in prospective real estate office, into the Principals' office, sit down and start chatting (which has done many times). He is part of the small percentage of people who have the personality and skillset to build a successful 'anything' business without paying referral fees. But he chose to pay referral fees.
When Phil commenced his broking career in 07' he asked what the most successful brokers in Australian Mortgage Brokers had been doing over the previous 7 years. He was impatient and wanted to get to the top quickly. The answer was paid referral partnerships so he pinned his ears back and never looked back.
Why are paid referral partnerships so good?
As I touched on earlier paid referrals only cost you money when a sale is made. Even better the referrer doesn't get paid until you do.
Say for example you pay 20% of your upfront commission as a referral fee, say $480 on a $400,000 loan at 0.60% upfront. If your referral to settlement ratio was 25% your cost per lead for that particular referrer is $120 per lead (not bad?). At the better end of the scale even if you closed 1 in 2 or 2 in 3 leads, the cost per lead is higher but you are still earning 80% of commission that you would have not earned otherwise.
I'm actually a fan of paying big hitting referrers a percentage of upfront and trail. This elevates the relationship to partnership status and keeps the broker top of mind each time the referral 'partner' receives a commission statement and or reconciles the trail payment (as small as it may be) in months where new deals have not settled.
But my referrers don't want to be paid!
Great! find some who do.
In late 2005 I handpicked a group of 12 brokers who were writing on average $1million per month, with a view to helping them double their volumes over the next 6 months. "The Producers" as we called ourselves caught up every month, for a two hour teleconference where we discussed strategies to grow our volumes. I offered a reward of an all expenses paid day of fun prior to our conference to be held in Auckland in August 2006, if the group collectively lifted their volumes from around $12m per month to $24m per month at least two times before the conference.
We achieved it of course and the 12 brokers and I enjoyed an amazing day of trap shooting, archery, massages and team dinner a the luxurious Hotel Du Vin on the outskirts of Auckland ... still one of my favourite days ever. I even had to endure a massive chewing out from my ex-wife the next day back at conference headquarters about the $3,500 bar tab the night before. I digress :)
So what did we spend most of our time talking about at these monthly coaching teleconferences? Paid Referral partnerships! I've always remembered one participant who regularly talked about his strategy of not paying referrers at these meetings. After 3 months it finally got the best of me and I asked so how many referrals this strategy had generated. "None as yet" was the reply.
So vaccinate your broking business today and put it on the path to success. If you want to run a ultra successful broking business talk and listen to the people who have run ultra successful broking businesses.
Footnote: Incidentally the most successful lead generation campaign I have ever run was a 'Win a holiday to Hamilton Island' competition just after the GFC hit. We ran a direct mail campaign to our customer base, where they got one ticket for every finance referral made to one of our brokers. The prize cost $3000, we generated around 130 leads at a cost per lead of around $60, when you include printing and postage. It helped that we had a customer base of 7000 people at the time and I'd estimate at least 20-30% of those customers were originally secured via paid referrers.
Office Manager
8 年I have to agree Paul - it never hurts to use a little financial incentive for someone to send you regular leads. After all, if they make money out of us - we are obviously making money too :)
Investment Property & New Home Design Consultant
8 年So Paul when you tell your client that you paid $480 to get their name from an accountant or another "trusted" adviser and after organising a loan for them (and getting an upfront fee of $2400 and a trailing fee for doing your job) you then on sell them (refer them) to your real estate buddy or financial planner and you pick up another percentage of their commission. I would like to know how that conversation goes with the client Paul. Does the client fully know the truth of how they are bought and sold and how much you make out of them for doing nothing other than pretending to help them out? Or are you telling me that you only buy referrals and you do not sell them? I have read this post and the post prior about you and Aussie John Symond and your panel discussion. Let me see who has the biggest business. Aussie John,who does not pay or receive referral fees or Paul Gollan the one who buys clients? My business teachers always taught me that the client comes first and that you give service to them and treat them fairly and honestly the money flows as a result.
Director at My Loan Expert
8 年Great article Paul. My entire broking career and that of my team has been built off referral partnerships. The tougher the referral the better as these are the "stickiest" clients, knowing you have gone to considerable lengths to solve the clients financial issues. I have set up over 35+ referral agreements in my career, and now run a firm that has a reputation in the industry for delivering the results. The referral fees generated are just the icing on the cake for the referral partner. You produce the numbers and results, and the figures just work. If you only write one loan this month then paying a referral partner will hurt your bottom line, because one loan a month on commission means your bleeding slowly already.....but if you write 8 - 12 new loans per month, then the numbers will speak for themselves. If one referral partner isn't generating enough leads to provide the volume, then simply go and get more referral partners. It's not that hard. It just takes guts to approach the accountant, financial planner, or real estate agent to have these conversations. No guts, no glory. My only "marketing costs" are my phone to say hi, my car to personally say hi, and my business cards. I started broking in 2007 with Australian Mortgage Brokers under Paul Gollan's leadership, with no past financial / loan / banking background at all. The fact that so many brokers resist adopting this type of business agreement, means the opportunities for new new entrants to participate is awesome. I even have agreements with Real Estate offices that have loan brokerages in their franchise model, because the local broker supplied to them expects without any effort on their part that the said business will send them the business regardless because of the card they carry. This is a relationship business, with the lender, accountant, real estate agent, conveyancer, financial planner often part of and sometimes all of them involved. I now have a trail income that means I can give more of the referrals I receive to my team, whilst concentrating on the team as a whole and my existing client base of 600+ active clients. This model is really a recipe for success, you just have to treat it as a business strategy and work the numbers until the numbers work for you. It worked for me and all my team work this strategy successfully. Our business now has 10 brokers in our team and growing..... for the simple reason that we have a strong, active, reliable, referral stream of new business coming in.... we no longer wonder where the next lead is going to come from, just look after the referral partners involved and the business takes care of itself. Regardless of your approach, I wish you every success.