Mortgage Brokers: Most Common Complaints Post Purchase of Trail Books

A lot of brokers complimented a line I used in one of my previous articles. It goes as follows, "It is a no brainer that the best and quickest way to grow and scale your business is to buy profits than to earn profits organically." Almost in every broker group I am in, at least 80% of brokers want to buy trail books. The rest of the 20% of brokers don't want to either because they cannot afford it or because they know of the issues associated with the purchase and don't want to deal with it.

What are those issues?

1. Hidden Risks: A lot of aggregators cannot provide a detailed analysis on the non financial data of the trail book. Quality trail books get snapped up within 3 working days of being. Due to the overwhelming demand, mortgage brokers suffer from FOMO (Fear Of Missing Out) and are ready to buy a book regardless of the hidden risks. Yes, it is great to finally get a trail book given the returns but problematic loans that can negatively impact the book and deliver negative returns. For example: what if majority of the clients in the trail book are on fixed loans. You only find that out once you inherit the book. How would you go refinancing these loans?
2. Tax Implications: The purchase of a trail book is a capital expense. The starting price for a decent book is $150,000 and and the asking price for a massive trail book can be north of $7 million too. Brokers must consider the tax implications of this acquisition as they may need to generate a significantly higher income from the trail book to cover the initial outlay and subsequent tax liabilities. The run off rate is 20% currently. On top of that market analysts will tell you that if you do nothing, the trail could stop after 4 years.
3. Professional Indemnity (PI) Coverage: It is a common misconception that the newly acquired trail book will be covered by the existing PI policy. The buyer may need to extend their PI policy to cover breaches made by the seller. Also, the seller should not cancel their PI without consulting their provider. The PI cover needs to be active and in run off when the trail book is being sold.
4. Clawback Risks: There is a 'inherent' risk of clawbacks if the seller churns the book before the sale which can affect the trail income. It is crucial to get a sale agreement reviewed by a lawyer who deals with mortgage brokers on the daily. There has to be a clawback clause included. The buyer retains some of the sale proceeds for one to two years post sale to protect themselves. The percentage to retain is not a flat rate like a 10%. It depends on the previous history and how sticky the clients with the current broker are.
5. Legals: Buying brokers need to determine what approvals are required from the agreement holder under whose licence the selling broker is operating. The buying broker needs to understand the fees and net trail income under the aggregation agreement. The current split is applicable to the purchasing broker unless he/she refinances it under their own fee card. Confirm which client files are included in the sale (pre-approved, applications in progress and settled loans or only the settled loans? Draft a Deed of Assignment for the transfer of the trail book. Any legal document is expensive by nature but it is well worth the money spent.
6. Valuation: Getting an independent valuation of the trail book is recommended. That can range from $2,000 to $4,000. Top aggregators can provide an Information Memorandum (they have access to the CRM and the inbuilt data analytics team that can dissect the information) that help you justify the price the selling broker is asking for. Brokers should negotiate the strengths in the book (for example majority of clients are self employed clients in the 40 to 50 year olds range) what forms part of the consideration for the purchase.
7. Scams: As the calendar year comes to an end and business slows down for the holidays, a lot of brokers contemplate if they want to go on. Like end of year periods, this period too is peak time scams. Brokers should be vigilant if the 'anonymous' advertisment you see is a genuine seller and that others in the industry know the seller. Do not provide holding amounts as a deposit just to get your hands on a trail book. You only have to google trail book scams and you can see all the wrong activities that have come to light.
8. Client Transition: When acquiring a trail book especially from a retiring broker, it is important to ensure a smooth transition of clients including having access to their mobile number. This is now their clients have been getting in touch with them. With mature brokers, they haven't had a CRM from the start of their broker journey and be prepared to have missing data issues. This can affect client retention and service delivery.

These 8 points above are the most common issues that come to light. There are heaps others as every scenario plays out differently. As long as you and the seller are on good terms, you will be able to troubleshoot most of the pain points that come up.