Unpacking a Q&A

Unpacking a Q&A with the leader of a brand.

In the interest of not pinpointing any one person or brand in particular, I am going to refrain from actually using any names. My focus is rather on the content and responding to some of the items that have been floated in the past by others in the industry.

This is NOT about picking on someone, but the article presented what I consider to be a lot of misinformation that is floating around and I think it is important to challenge positions allowing for better industry dialogue.

First, it is important to note that a brand leader’s job is to steer the business forward and that can often mean relatively dramatic changes to a business model. It is also their role to have an opinion, and to express that opinion – that also means that they need to be prepared to defend their position(s). I am not doing this out of anything other than there are opposing views out there, and they should be heard.

As there is quite a bit to unpack, I am going to go based on the interview and instead of responding to each end every word, am taking specific sections of the interview. I am being careful to ensure that I am not losing the “intent” of the comment, but for those that want to see the whole interview, you can see it HERE.

O.K. Let’s get started! 

Comment made: “The biggest thing that is keeping us busy, and that should have the biggest impact in early 2021, is our pricing model. We saw that there was a need for a pivot, so we’ve recently moved to a flat-fee model, which will help brokers better understand their overhead and the overall cost of their business.”

I don’t actually have much to say about this just yet, but it is important to flag this as it is relevant to some of the comments made later on in the interview.

What I will say now is this:

Any good business person, no matter the nature of their business, should understand their overhead costs regardless of if it is a flat fee model or not. Also, as a franchise organisation, it is the responsibility of the franchisor (brand manager) to provide the opportunity for a franchise owners business to be profitable through a tried and tested business model.

Next! This next bit is regarding the movement in the industry for brands to build and launch their own technology. There seems to be a bit of a misunderstanding with how it works and what the brands are trying to accomplish.

Comment made: That’s the impression being presented to brokers – you need tech to win. But ultimately, the real agenda there is that everyone is trying to capture those last few basis points.

This is not strictly true. There are many reasons why a brand would want to have their own technology and have their franchise network use the system that they provide. While there is an opportunity to drive additional revenue, the reality is that today brokers do not generally pay for the basic technology offered to them. Filogix has always been a free solution to brokers – the lenders pay for the system. With the development of their own, yes, they have an opportunity to potentially earn an extra basis point or three, but that is equivalent to 0.0001 or 0.0002% - to put it into perspective a brand would earn a whopping $200.00 per million of mortgage volume – and that money is paid by the lender. The company needs to cover the costs of building and maintaining the technology.

More importantly, brand owned technology that is used to good effect by a franchise owner and their teams, helps to tie the franchise to the brand. New technology is notorious for being complex to learn and integrate, thus less likelihood of switching brands if you have a well built unique technology offering.

Given that this change has no impact on the actual broker as it does not mean money out of their pocket, it really is not a relevant argument unless there are fees charged for the technology. If there are fees, are they for extras that are not included in the “free” technology?

I should note that the brand this leader represents has a free version, and then “add on” products which cost a monthly fee.

Comment Made: What you’re seeing is marketing. It’s being sold one way but, at the end of the day, the brands trying to do their own technology are starting to almost force their technology on to brokers by leveraging access to lenders and the broker’s own data.

The client data still belongs to the brokerage, and that is enforced by law and the fact that in the Canadian Mortgage Marketplace franchises all display the simple statement “Independently Owned and Operated” – that, and the terms of the franchise contract, means that they cannot FORCE anyone to give up their database or use a specific system. They can promote, market, and sell – but they cannot force.

This is a common scare tactic used to try to sow discontent in a network.

Comment Made: It’s not publicly talked about, but Filogix, the industry standard for 20 years, makes its revenue from being that secure pipeline that takes information from the broker into the banking system.

This is not news, it is not a secret, and it has never been hidden from the industry. Filogix, through years of acquisitions, became the dominant technology player. For decades brokers have relied on third party systems that are paid for by the lender – this shift to brand owned technology in Canada is actually decades behind other countries.

Comment Made: What’s really unfortunate here is that I think you’re going to see choice taken away from brokers. That’s really sad.

This move to brand owned technology actually increases the choice that brokers have as there becomes options as opposed to what was once a 98% market share by Filogix.

The issue of choice being limited in the industry has far more to do with the consolidation of brands than it does technology. In fact, this brand leader stated last year that they did not believe in consolidation, but then this year announced the acquisition of a competitor… so less choice by their own hand. There are three brands that have been the dominant players in the consolidation of the industry resulting in less choice – two obviously more so than the third, but there are only three that have embarked on acquisition activity.

Comment Made: If you’re locked into a contract and that contract says you no longer have a choice on how you run your business, I think that’s a major disservice to brokers. I hope they think long and hard about the consequences, given that this is the underlying agenda at these brands now.

This is a VERY interesting comment coming from a leader that runs a franchise organisation. A franchise, by definition, is a proven business model that is designed to provide the “how” behind the business and create an opportunity for profitability and to build a saleable business. If a brand does not have a tried-and-true business model, then what is it they are selling their franchise owners currently or have been selling for years? The use of a logo?

The WHOLE point of a franchise is that you are provided all of the tools and support you need to build and run a successful business. Part of that means entering into a contractual agreement. This agreement, if structured properly, should provide protections to the franchise owner and the brand. Having a term gives both parties stability and makes it far easier to plan for future growth and profitability.

When the top executive of a franchise organisation makes a statement that criticises a model that they have run under for almost 20 years, it begs much broader questions (will get to that in a bit).

Comment Made: We’ve become tech agnostic. You use what you want to use. Obviously, we have a tech partner in XXXXXXXXXXX, and they provide XXXXXXX, their direct-to-lender connectivity platform, but at no point have we ever said, “You have to use this. We strongly urge you to use this.”

That’s language we just don’t have because most of us here are, or were, mortgage brokers. We would never want to be put in a box. We will never put our people in a box, and every tech decision you’re going to see us make is going to be made with that idea in mind. We’re not dictators, we’re business partners.

While it is true that the use is not mandated, that is more due to the language use in the terms of their franchise agreement. This brand does however very heavily promote their technology through advertisements, both within their network and in the broader industry. So not really any different than any other company out there today.

Comment Made: Competition and innovation breed choice, and choice lowers prices, so I think a 3-5% royalty model is just archaic. I think the big brokers are doing that math, and the value, or lack thereof, is becoming apparent. They’re realizing, “Wait a minute. You’re taking 5% of my nut but I’m paying for all the stuff I want to use because I don’t want to use what you’re trying to jam down my throat?”

Run the numbers. If, every single year, I’m giving my brand $50,000, am I seeing $50,000 worth of value? Even if it’s 3% on $1 million in revenue, am I getting $30,000 in value? I think some uncertain times are ahead, and I think you need to think about what you’re getting for that $30,000 or $50,000. Because if you can get the same value on your own for a fraction of the price, maybe it’s time to take a hard look at your decisions.

Just because you’re working harder and you’re seeing a lot of success, I don’t necessarily agree with the attitude that the brand should win more. The era of overpaying because you drank a brand’s Kool-Aid at one point – those days are over.  

There is a lot to unpack in the above. First, I want to go back to the statement that this company is changing their pricing model from Royalty based to a flat monthly fee. This is a company that for the last nearly 20 years has charged a royalty to their franchise owners.

For any company to suddenly shift their revenue model there are two main reasons for doing this:

a)      The new model creates greater revenue and profitability opportunities for the brand.

b)     The brand has been unable to demonstrate value in the business model and to retain and attract franchise owners, they need to re-align their revenue model.

No business is going to change their revenue model if it means that they are earning less than their current model offers.

So, in this case the move to a flat fee either means that they are making the same or more – it doesn’t matter what spin they put on it.

It also needs to be understood that a basic flat fee model also means it is easier for the brand to charge user fees for some services.

In the example used the executive is quoting both 3% and 5% and they go on to talk about $30,000 or $50,000 per year and are they getting their money worth? That is the questions that brokers should be asking themselves, absolutely. It is what I have been pushing now for a year in relation to what Haystax offers and as a testament to the value we have sold 3 major regions in Canada and have several other candidates looking to join.

Why? Simple, we can clearly define and illustrate the value that we are providing someone who makes the decision to purchase a Haystax Franchise.

If we look at other companies in the industry, they too are growing under the Royalty model. People would not join if they did not see the inherent value in joining the business. To say that the model no longer works, simply is not true and there is ample evidence that clearly shows this.

The all too obvious question for me is this… Why would a brand overhaul their revenue model away from royalty after two decades if they were providing the dollar to dollar value for the royalty that they collect? The answer is simpler than you might think… they haven't been or they would not be looking for an alternative. If there was no question about the value, the change would not be happening.

It is also not necessarily true that choice equals lower costs, and lower costs do not always mean better. Discount companies exist in every industry, just as average and higher priced models also exist. If there is demonstrative value in what you are offering for the price you are asking, then it is not expensive.

The reality is that it is easier to change the revenue model than it is to spend the time, money, and energy making improvements to bring the value up to the same level as the royalty collected.

Comment Made: I go out of my way to not make predictions about the market. We’ve seen during the pandemic that even the most educated minds in the Canadian mortgage industry didn’t get it a little wrong, they had no clue what they were talking about.

I think that this is only partially true. While the pandemic has made it inherently difficult to predict what would happen, this is true in every single industry around the world. An industry leader who tries to make sense of it all, and offer some insight, is better to engage in this way than to just ignore the problem. Leadership is not about being right, it is about acting as a guide, and that means being informed and conveying information as best is possible – even if that information is subject to change.

Comment made: We already have brand leaders who are really good at either regurgitating BNN reports or going out of their way to let you know they know more about you than they do about mortgages. I don’t spend any time thinking about it. No matter what, we’re going to make sure our agents and brokers are prepped.

Brand leaders who take the time to research, learn, listen, and communicate to their networks are in a far better position to react to market changes than someone who “doesn’t spend any time thinking about it”. The pandemic has made some very significant changes, not just in business but culturally around the world. A brand leader who “regurgitates” what is being reported is actually doing their networks a service through the amalgamation of multiple sources of information into something that can be easily digested. A leader provides information and guidance, they do not ignore what is happening around them.

I cannot for the life of me think of how anyone could claim that their focus is ensuring their network is “prepped” if they do not "spend any time thinking about it".

This international health crises will change everything about our world, whether we want to admit to that or not is irrelevant. It is an executives job to plan for the future, determine possible outcomes, and to make predictions based on the most current information. They then take that information and use it to find ways to enhance the revenue and profitability of the franchise owner, thus also at the same time doing the same for the brand. They need to be flexible and willing to change as new information becomes available and we all have a better understanding of the longer term impacts of the pandemic.

Gary Mauris and Dominion Lending may very well be competition for Haystax, but as our business model is so different, there is ample opportunity to grow the overall industry footprint - so I am all good saying this next bit. I have known Gary since Day one of Dominion Lending, and while over the years we have not always agreed, I have a deep respect for Mr. Mauris and the amazing job he has done building and engaging his network(s) especially during these strange new times. I consider Gary to be a friend and he has always been very supportive of me personally and professionally. He has taken an active leadership role during COVID - Gary and other leaders who have done the same should be applauded - not criticised for what they are doing. It take far more energy and effort to do something than it does to not "spend any time thinking about it".

Comment Made: If you want an actual prediction, yes, refi’s are going to go down, but I do think rates are going to remain low for a few more quarters at least.

This is a bit of a weird comment. First the bank of Canada announced a month prior to this interview that they would be holding rates where they are until as late as 2023, and at least well into 2022, depending on the pace of economic recovery. This stays true for fixed rates as well given that government around the world are buying up bonds, thus keeping bond rates significantly more stable.

Knowing what is what and thinking about it means that you can convey accurate information to your network. This statement proves that not paying attention doesn't really work.

Comment made: I’m curious to see what happens with the new lockdowns and if they’re accompanied by a new wave of businesses going under or further layoffs.

While we are all curious to see what happens with another lock-down, a far better focus in my opinion is planning on how to keep our own franchise owners in business. Actually, Haystax has helped other business through partnerships and other support throughout the pandemic. We may be a small, new, company – but we are doing everything that we can to help whenever we can – not just our customers but also our business partners.