How do you diversify?

by AB13 Jan 2016
Two brokers tell us how they’ve managed to add new revenue streams to their businesses ...

David Lipschitz
Managing director, Logic Wealth Group


What areas have you diversified into?
My business has been running for about 10 years now, and we started off originally in residential and a little bit of commercial finance. Over the years we diversified within the finance space initially, so we built up a specific commercial division and equipment finance division. However, in the last three years or so, we’ve incorporated a finance planning arm and investment property arm. We are currently in the process of diversifying our demographic as well. We are looking to set up an office interstate.

Why is this important?
There are a few reasons. First reason was I saw where the industry was going, much like where anyone operating in financial services is going. Anyone who doesn’t have strategic alliances or have diversified will be left behind. You look at any of the larger finance firms out there, they have all diversified because the focus these days is on advisers. If you are an adviser, generally you are the nucleus that glues together a number of the other professionals. You either do it or get left behind.

The second reason was so I could provide diverse income streams. I saw after the GFC that certain areas started really hurting. I am lucky as we aren’t based in Sydney, because I know some areas in Western Sydney were just really hurting at that time. So, I learnt pretty quickly it was useful to diversify your income stream. When one area is performing less than others might be able to fill in that void.

I also acknowledge that I had a database that had a value, not just to my finance arm, but also had a value to be mined for other purposes. Being able to mine that database and cross-pollinate it with the other businesses has worked really well. Obviously we build trust with our clients and we are only going to do the right thing by them. We are only going to offer them something which is genuinely in their best interests, so it is never a cold call, it is a very warm database.

I also felt that much like a lot of the big banks do, as soon as they have more than one product with the client, they secure their client far more. If we have three or more products – those products might be a commercial finance loan, a residential equipment loan, financial planning advice and an investment property – it makes the client far more sticky. We have had a lot more touch points with the client, so we could firstly know if there was ever an issue and secondly, if they were ever looking to purchase another property, increase their portfolio or gain additional finance, the financial planning arm would know and would be able to inform the other arm to remain on top of it.

Finally, it has also limited exposure to our competitors. It is all about competitors. If we were only focused on credit and so the client went to another financial planner, they could have alliances with other finance brokers or other investment property arms and there would be far more of a chance that we could lose that client.

How has your aggregator helped you to diversify?
When I first joined FAST in the early 2000s, they had a very limited equipment panel and also a very limited commercial finance panel. Since then – and I believe they now have a specialist to focus on growing these channels – their commercial panel is strong, as is there equipment finance panel. This has made diversifying my finance services very easy.

What are they doing outside of just being a panel of lenders?
Initially when we were looking to set up our financial planning arm, we looked at a few different models. I had a lady working with me who had all the qualifications for financial planning and I wanted to grow that side of the business so we worked with FAST and they were happy to assist us with marketing and we had a period where we didn’t have to pay a licence fee as we were setting up the business. That was useful but it didn’t work for me in the end because I work predominantly with high-end professionals. It wasn’t really going to work with having a new, young financial planner. I needed to work with someone who had more experience and was very savvy.

So FAST helped me with another model which they also offer, where they essentially link in financial planners with me and they will pay us a referral fee or we could actually own part of the book. We knew our clients were safe and that we could have some ownership of the book but the other key issue for me was that I wouldn’t have another arm that is growing the business for me. They were never going to refer me new business.

So, in the end, I went with another model.  I essentially entered into a joint venture with an experienced financial planner and that has worked really well for me. We jointly own the book but he also brings in business. He comes under my brand; brand recognition is important to me. Suffice to say, that was just for my business, there were many models that FAST offer that would suit what other brokers need.  

What advice would you give other brokers?
There are a few considerations I would give to other brokers considering diversifying their business. The first one is whether to go organic growth versus acquisitions. They both have their pros and cons.

The second thing is whether you establish a brand new arm and try and set up all the systems and processes from scratch or you enter into a joint venture. A joint venture made more sense for me, as I was wanting to grow interstate.

My final word of advice would be a word of caution. If you are going to diversify your income stream, there are risks to your referral stream. For example, if you are setting up an investment property arm and you had a number of real estate agents who brought you business, that may put those referrals at jeopardy. There are those risks and you have to weigh up those risks with the rewards. But for me and my business, the benefits outweigh those risks.

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