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Brokers often overestimate the income they will receive from their trail book when they retire, veteran trail book buyer Nicholas Young has said.
Young (pictured above), the managing director of Trail Homes, said brokers also underestimated the impact it would on have their future when they backed off on writing new business later in their career.
With the mortgage broking industry having begun in the 2000s with an injection of entrepreneurs often aged in their 30s and 40s, many of whom were ex-bankers, the industry is likely to see more successful brokers setting themselves up for retirement over the next five to 10 years.
Young said there were often misconceptions about the ongoing value of trail books. He said brokers should plan ahead and consider their retirement and succession strategies to avoid being disappointed with a lower retirement income than expected.
“Every broker I talk to will tell me how sticky their trail book is,” Young said. “There is this pre-conceived idea that their trail book is never going to go down in value, and that it will continue to pay out each month the same it has been paying out every month for some years.”
“However, what they fail to recognise is the reason it is stable is they have been putting new loans in as quickly as the old loans have been going out. If you stop putting loans in it broadly halves every three years, and having a trail book halving every three years is not a good retirement strategy.”
Young said that, after a broker retired, they could expect most new business to dry up within 12 months. With trail book run-off rates of 20%, a book that had been producing $120,000 per annum would be down to just $96,000 per annum – or $65,000 after tax – after one year.
That same trail book would be producing $61,000 – or $41,000 after tax – by the end of year three, and by the end of year six, a broker that might have been expecting to enjoy a $120,000 a year lifestyle for longer would be producing only $31,000 – or $21,000 after tax – from their book.
Young said trail book run-off rates pushed up to a “very high” level of almost 30% in 2022. While the current rate was still above normal at about 25%, Young expected this to fall further over time to come in line more with historical normal rates of about 20%.
Brokers who seek to find work life balance later in their career – and who back off from marketing for new business and lose the forward momentum of accruing new trail income from new business - are also risking the eventual value realisation of their trail book in retirement.
“Brokers can go into drifting mode, where they cease proactively marketing, they aren’t hungry,” Young said. “They might have a nice trail book, write the odd loan, but they are not working too hard and are pretty comfortable – what they are missing is that their business is quickly deteriorating.”
Within just a few years, Young said the damage done could be “enormous”.
“They have 30 or 40 years of retirement in front of them. You really only get one crack at this – you’ve spent 20 years setting it up and building it, and the peak might have been fantastic, but then you can see a business wither over just a few years to a shadow of what it was.
“When brokers talk about wanting work-life balance, that is fine. But what you are also telling me is that you are going to let your business deteriorate. And at the end of the day, you have to pay the bills and it is likely that you are going to live for a long time.”
Young said he likened this tendency among largely successful brokers to the art of surfing.
“A good surfer cuts back out of a wave when it’s still strong, and then goes in search of another wave. They don’t ride it down to nothing. Some brokers ride it down to nothing and arrive on the beach and they have still got years to go and they don’t have the energy to swim out anymore.”
Young said mortgage broking books usually followed a predictable trajectory. In the first stage upfront commissions are much higher than trail commissions, and then as trails build, businesses reach a middle stage where a business is “mature” and upfronts will broadly equal trail commission.
In the latter third of the broker business lifecycle, upfront commissions start to be less than trails.
“At this stage you might be getting $10,000 a month in trail and writing a million in business a month, just as one example, and that business is in decline,” Young said. “When marketing stops, upfronts can fall away remarkably quickly. Trails fall more slowly, but that is the danger zone - you are dithering.”
Young said in the third stage it could be very difficult for brokers to get marketing momentum going again after it slowed down. “They never have that energy again, it can be impossible.”
Brokers should talk to “as many people as they can”, Young said, including their accountants, and then start putting in place a real plan as to how they would exit their business. “Procrastinating and doing nothing is not the answer – the earlier you start thinking about it the better.”
He said there were many scenarios brokers could think about, from bringing in and rewarding a younger broker who will eventually buy them out – which could enable them to start doing less hours – to mergers with an accounting firm or one of their referrers.
Young said brokers should also consider the ‘sell or keep?’ question carefully when it came to their trail book, as currently available tax incentives for small businesses can make selling much more worthwhile than holding onto the book and seeing it dwindle in value through run-off.
“Brokers should talk to their accountant and get a good understanding of the tax consequences of selling their business. There are currently enormous tax concessions available to small business people when they sell, which can result in double the benefit then keeping their trail book.”
Are you concerned about the value of your trail book or business when the time comes to retire? Share your thoughts or stories on this topic in the comments section below.
