With around half of UK mortgage brokers still one-man bands that the company says ultimately sell their businesses for “peanuts”, Dave Corbett - TMG’s recruitment and brand development director - believes there is an opportunity to better harness this talent.
Founded in 2015 with just two firms under its name, TMG has since expanded its broker count to five directly authorised firms and five appointed representatives.
But rather than recruiting anybody and everybody, Corbett said at a recent briefing: “We don’t want to be a huge behemoth of a network. We get dozens of inquiries each week, and we turn away plenty.”
Having set itself the aim of generating £2.5m in annual revenue from its branded partners, the minimum entry level for new firms and advisers to join TMG is £250,000 in annual revenue. Eventually, the network wants to house some 50 branded partners.
But TMG hopes to at least double these firms’ turnovers through its network-wide support and mentoring in the years to come.
As well as bringing on directly authorised firms, Corbett and his team are looking for skilled individuals via the network’s ‘TMG Direct’ arm, which grows brokerage businesses from scratch.
In the long-run, Martin Stewart - another of TMG’s directors - said the group’s growth project “is about creating a legacy”.
“We want to be able to leave something behind which lasts for 100 years. There are really good business people in this industry, but they’re stuck being business writers. If we remove these barriers, multi-adviser businesses will scale much quicker.”
He continued: “The supply chain is comet shaped. All the density is at one end with the networks and nationals. Then it peters out to loads of small, disparate one-man bands. The comet tail either needs chopping off or to be pushed to consolidate.
"That’s where we come in. With our offering, we give scalability and visibility - things the smaller broker firms struggle with.”
Low-cost, low risk
TMG is taking a “low-cost, low risk” approach, according to its directors.
Revenue is spread across four streams. One is a 10 per cent franchise fee, which Stewart said was competitive compared to the industry network average of 14-15 per cent.
Then TMG has its appointed representatives model, through which it can earn anywhere between a 10 to 25 per cent retention fee. Stewart and Corbett consider this “passive income”.
Its third revenue stream originates from TMG Direct, the arm which employs individual advisers, trains them up, and then releases them to manage their own businesses under a DA model. When these individuals are ready to exit their businesses, TMG will buy them back.
And finally, there’s TMG’s mortgage club - or ‘TMG Club’, which is set to deal with specialist lending options, such as bridging and commercial finance.
A big part of this model relies on the brokerage sector’s willingness to be consolidated. Stewart reckons this consolidation is coming, whether brokers like it or not. “The massive long tail of brokers currently means they’re disappearing off into the ether. Commercially, they’re not worth anything to lenders.”
TMG envisions the industry morphing into 20 well-capitalised names, or networks. “We want to be one of those 20,” said Stewart.
“We’ll do this by pushing the brands out on their own and reeling them back in when they want to exit. That way, they can remain directly authorised, appoint their own managers and avoid the debt network group model by being bought out at the end instead.”
In the long term, TMG sees the value in localised aggregator websites like MoneySupermarket to connect and reward its broker network.
“A few years ago, we went all-in kicking doors down - but this wasn’t the right approach,” Stewart recalled.
“We should have collaborated more. While there are many issues within intermediation, the lesson we learnt was not to always highlight the negatives, and instead work alongside our peers.”
Stewart added brokers were “miles behind IFAs”. He continued: “It’s dangerous to keep things the way they are. It’s so expensive for brokers to get paid. But they’re so bamboozled they just lump it. It’s like Stockholm syndrome, where they think the industry is helping them but in fact it isn’t.”
The first lender to come onboard to TMG Club 2.0 was Vernon Building Society, a specialist buy-to-let, retirement interest-only and Buy for Uni mortgage provider.
In addition to its lending partners, the network intends to create its own lending platform and conveyancing proposition. By owning the full product cycle, TMG thinks its network is more likely to retain clients in the long term.
Any leftover money is then reinvested back into the group and its brands.
TMG’s executives - like Stewart and fellow co-founder Scott Thorpe - don’t earn an executive-level salary from the group’s coffers. Instead they run their own brands and benefit from capital growth as shareholders in the business.
“One of the main pieces of feedback from the brokers we hear is that they are concerned about how much senior managers take out of the business. Some brokers feel aggrieved that their hard work is paying for someone else’s holidays,” Stewart explained.
“With our model, the senior managers keep some skin in the game, as they run their own brands. So any income requirements come out at a local level, rather than from the communal pot.
"This allows us to reinvest the retention fee back into making the group and brands bigger. It becomes a self-fulfilling business model.”
Still in its early stages, TMG is also considering developing its own direct to consumer app. It is currently assessing the route of gamification, in order to educate individuals on mortgages - though the group is clear this will not verge into a robo-adviser model.
“Evidence shows young people still don’t understand how mortgages work,” said Stewart.
Last week, Mortgage Advice Bureau (MAB) released research which found around 89 per cent of mortgage advisers believe first-time buyers need more education on purchasing a property and what is needed for a mortgage application.
One cohort of companies targeting first-time buyers is digital mortgage brokers. In the last year, the space has enjoyed significant investment.
Habito landed a £35m funding round back in August 2020, and this month two US firms bought digital mortgage brokers Mojo Mortgages and Trussle - although the latter reportedly only sold for £6.5m.
“There is money out there,” said Stewart. “Investors are buying into the dream of digitising mortgages. But a lot of this money has been burnt. We’re not going to spend millions on a load of kids wearing converse playing pool in the kitchen. [...] We can manage the tech threat.”
Fleshing out protection
As well as focusing on the lending side of the brokerage business, TMG also intends to tackle the age-old protection gap - that is, the gap between the number of borrowers who own a mortgage and those who have mortgage protection.
“We’re building out our protection network,” said Corbett. “But we don’t want to be a call centre mortgage broker or protection provider. That’s a very risky business with an average 40 per cent customer fall off rate.”
Looking back at past brokerage and protection networks such as Network 300 - which fell into insolvency back in 2005 - Corbett said the “safety in numbers approach” is clearly no longer a viable business model.
“The current tranche of networks are pretty safe and well-capitalised,” he said.
Currently, TMG’s brokers are operating on a less than 50 per cent mortgage protection penetration rate, compared to the number of mortgages they’re processing.
The network intends to double this rate to 100 per cent over time. “It’s a huge revenue opportunity,” said Corbett, who previously worked for the PRIMIS Mortgage Network - where he said they took an “aggressive approach to protecting every pound of debt”.
It will also be an education piece for brokers, according to Stewart - echoing a sentiment held by much of the industry.
“What’s really resonating with brokers now is the ‘freedom’ we can create for them. Freedom from micro-management, freedom from overly-rigid and enforced processes, freedom from unfair contracts, freedom to run their business as they see fit.
The legacy is a huge part of what we are about, which is why it’s important to understand how they [brokers] expect to eventually wind down. No-one else is talking like this and certainly not as one broker to another.”