By treating each deal as a single
transaction to be placed with the most profitable source, a broker
is being true to his definition, but is not necessarily creating a
platform for longevity.
Nor by encouraging this practice, with the
structure of commission packages, is the funder. Long term, the
relationship often breaks down when bad debts begin to grow,
debit-backs kick in and both parties often just move on to a new
partner.
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So how can we change this cycle? The joint
venture model is the answer. The broker takes on the duties of the
sales division, and the funder takes on the duties of looking after
risk, underwriting and collections. Both profits and losses are
shared on the book as it grows and matures.
This model has worked well in recent years
with a small number of brokers and funders, and I for one am
surprised it has not been replicated by others.
In order to succeed, both parties have to
realise that the understanding of security in the relationship is
critical to portfolio growth. Additionally, the broker needs to
shift mindset from short-term gain to one of long-term increased
profitability, being prepared to take a share of risk for the more
likely greater reward.
This movement to future revenues can impact a
broker’s cash flow; an understanding of this, and therefore support
from the funder, is crucial. The funder has the benefit of a
partner who is much more focused on quality and efficiency, but
must commit to sharing much more information on pricing,
underwriting, collections and arrears than historically would have
been the case under the traditional transactional relationship.
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By GlobalDataAs we exit recession and credit crunch and
move into more positive times, with hopefully new funding looking
to enter the market, what better time to make this transition?
Richard Hoggart is head of DSG
Financial Services
