James Deitch James Deitch and his new book.

The residential lending industry is “ripe for disruption” — and who’s better positioned to disrupt it than wealth advisors with solid client relationships? To be sure, they can nimbly integrate the liability side of the balance sheet with the asset side, which they already manage, argues James Deitch, founder-CEO of the consultancy Teraverde Financial, in an interview with ThinkAdvisor.

“Pulling transactional income out of the mortgage originator’s market and putting it in the advisor’s market” will reduce clients’ cost: the $3,000-$5,000 commission that loan officers realize on every loan, says Deitch, author of the new book, “Disruptive Fintech: The Coming Wave of Innovation in Financial Services…” (De Gruyter – Dec. 15, 2019).

Disruption occurs when “a process, method or product becomes so compelling that it is ubiquitous,” according to Deitch, a veteran of more than 30 years in the residential mortgage banking industry. He was president and CEO of five federally chartered banks and the founder of two national banks.

Warns Deitch: Ignore creative destruction and disruption “at your own peril” — if you do, someone will likely take over your business.

Indeed, financial advisors should be well aware that “any business that is an intermediary or broker faces a revenue-stream attack,” as Deitch writes.

In our interview, the CPA and certified mortgage banker, whose firm’s operations are based in Lancaster, Pennsylvania, discusses his surprising take on fintech, which he defines as “technology — electronic or otherwise — that enables an end-to-end business process … Today’s digital transformation is just “one segment” of the overall “fintech ecosystem.”

Fintech’s roots, he says, date to 600 B.C., when the Greeks created seller-buyer markets by means of merchant ships.

ThinkAdvisor recently interviewed Deitch, on the phone from his Naples, Florida, office. Loan officers’ high commissions are “just crazy,” but financial advisors managing the liability side of the client’s balance sheet is “a logical extension” of managing their assets, he opines.

Here are excerpts from our conversation:

THINKADVISOR: “Creative destruction and disruption in [many industries] will be material. Ignore it at your own peril,” you write. Please elaborate.

JAMES DEITCH: It’s about ignoring the ability of someone else to move into your business. My hypothesis is that we’re going to see this happen to the residential finance business. Residential lenders will get disintermediated and disrupted by a low-cost online direct-to-consumer model that will chip away at the loan officer’s ability to get a commission. They’ll get hit from the other direction by a very relationship-oriented financial advisor who says: “Don’t do a mortgage or debt financing with someone else. Do everything with me. I have the whole view of your [wealth].” The traditional residential finance loan officer will get squeezed.

Why is now a good opportunity for financial advisors to move into this business?

Because asset allocation is only one-half of the customer’s balance sheet; the other half is the debt side, including mortgages. The time is here for financial advisors to think about how to manage the liability side and attack the residential finance business in particular. Those who think about integrating the asset and liability sides provide the leadership to expand their revenue opportunity by giving the customer a better, holistic deal.

What’s the disruptive thought leadership pattern that you see in financial services?

Right now, everything is siloed [isolated]: there’s the wealth management business; and there’s debt side, including the mortgage banking business. Financial advisors can pull some transaction income out of the mortgage originator’s market and put it in their market. This reduces the cost of transactions for the customer.

How high is that cost?

My brother, a financial advisor with a large national firm, tells me that the cost to do a [mortgage] transaction within his firm is usually a fraction of what it would cost for a typical mortgage loan officer to finance a house. On a $300,000 loan, for instance, the customer would pay a loan officer $2,500-$3,000 in commission. Loan officers get $3,000 to $5,000 [per] loan. That’s just crazy. It comes through a higher interest rate rather than being explicitly stated.

How difficult is it for FAs to make the move into the residential finance business?

It’s a logical extension of managing the client’s balance sheet. Financial advisors already have the platform in place and the ability to handle both the asset and the liability side. They already have the client relationship. Doing the loan is fairly straightforward; it can be automated. So the financial advisor can take care of that [and other aspects] and save the client about $3,000-$5,000 that would have been paid to a commissioned loan officer.

What, then, would happen to the job of loan officer?

The job as it is currently will be eliminated. The fact is that when someone gets a loan through a loan officer, four out of five customers go elsewhere the next time they want a loan. There’s just a small segment of loan officers who are very effective in keeping in touch with the client and therefore have a much higher retention rate.

What are the key implications of this situation for FAs?

It’s an opportunity for financial advisors, and it is why I think this business is so ripe for disruption: financial advisors already have the customer relationship focused.

“Thought leadership is the true catalyst of disruption,” you write. Please explain.

The thought leadership of saying, “I’m going to do this,” is truly the disruptive weapon. For example, Jeff Bezos [Amazon founder and CEO] initially said, “We want to build the biggest bookstore on earth.” Then the company rapidly expanded its thinking: “Why can’t we sell other things?” and they built one of the biggest distribution networks on earth — all that in [only] 25 years.

Then, two years ago, Amazon — a “born-digital” company — acquired Whole Foods — a “born-traditional” company — in order to enter the grocery business. Is there a parallel here to potential disruption in financial services?

Amazon integrated those two businesses: theirs and Whole Foods. That’s the type of disruptive thought leadership pattern that I think presents [itself] in the financial services business: to integrate the wealth management business with the whole other business of mortgage banking, which generated $60 billion this year basically providing a single product to the retail customer.

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