In financial services there is much talk and advice given to clients regarding diversification and ensuring they spread their risk across a variety of investments.
This is sound advice and it is right that clients do not hold all their eggs in one basket. Having a mix of investments will limit their exposure should they take a hit in a particular area.
The same could be said for intermediaries. Given the current situation with regards to the non-conforming market, it would seem obvious that brokers look to other markets to ensure they are not over-exposed to just one sector.
At present it may be difficult to source deals for clients with adverse credit, but advisory firms will still have their own targets to hit and now may be the time to look at other product sectors and client types to ensure an ongoing profitable business.
One area which brokers can look towards is that of commercial mortgages. While they may not have conducted any business in this area, there is much overlap between commercial and residential. Indeed, you might even call commercial mortgages the first cousin of residential mortgages because of their similarities.
The opportunities within commercial are worth considering given that there is a huge market available. Traditionally, this sector has been dominated by the big banks but this is starting to change. Even so, only 20 per cent of commercial mortgage business is currently being introduced by brokers; compare this with the residential market where the figure is closer to 70 per cent, and we can see that there is much to be played for.
A number of brokers may be put off by the fear of the unknown with the commercial sector, but there is little to be frightened of with these types of cases. Once an adviser has one or two cases under their belt they should be comfortable with the sector and its demands and requirements.
Time and effort
It is quite true to say that a commercial mortgage can take more time and effort for an adviser than a residential mortgage. Because of this it is important that advisers firstly research the sector and look at the time and investment needed to successfully advise and recommend in this sector.
Firms should not enter the commercial sector blind; neither should they be apprehensive about conducting business in this market. After all, let us not forget that commercial mortgages offer greater margin to lenders and consequently, they are able to offer brokers a bigger share of that margin with higher procuration fees.
Because of the work involved in placing a commercial case, brokers should also think about their fee structures and what they are able to charge their clients. Remember as well that the size of the loan amount for each case tends to be higher, in many cases twice the size of a residential mortgage case, with the added benefit of the proc fee return for the broker.
Commercial cases are not necessarily more complicated than residential cases and, indeed, lenders are working hard with brokers to ensure that the process is as simple as possible. The new lenders in particular that have entered the commercial market recently have worked tirelessly to open up the sector to the broker distribution channel. They have worked on the technology available and the product range to ensure there is not only more choice for borrowers, but much more choice for brokers.
Making quality partners
Brokers involved in the commercial sector should look to quality lender partners to make life easier for them and their clients. This means they should have relationships with good underwriting teams who will help with the transaction and be contactable at all times. To ensure the best service and products for clients, advisers should use an underwriting team that are mandated to make decisions.
Too many lenders rely on tick-box underwriting which is of little use in the commercial market where it is often not possible to fit a deal into such boxes. Having a personal and flexible service should be a pre-requisite for lender’s involvement in the commercial market. Unfortunately, this is not the case for all lenders.
Of course, breaking into the commercial market will require a client base. It is fortunate for many advisers that they have an established database which may well be already interested in commercial mortgages. For example, the current buy-to-let sector is providing strong growth for many landlords. However, they too will recognise the need for diversification and may well be looking to invest in commercial property. Most advisers will also have many self-employed clients that may be looking to purchase new or upgraded premises.
In today’s market it is important that brokers are able to satisfy their client’s demands, whatever they might be. Customer retention is the essence of any good business and no broker will want to see his or her clients going elsewhere for products which they could quite easily supply. The client will expect the broker to deliver in all sectors; it is up to the broker to ensure they have the products, sales skills and expertise to be able to do this.
The commercial market can offer further opportunities to advisers at a time when other sectors are feeling the pinch. Firms looking to become involved should ensure they conduct the necessary research and are aware of their responsibilities to the client. They should also look to partner with a number of lenders active in the sector and those who have the broker at the heart of the business.
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