The rapidly expanding mortgage brokerage industry is seeking out new bonds with financial planners, and many advisors would do well to see if such a relationship would benefit their clients and businesses.

“It’s an interesting trend,” says Paul Grewal, president of the Canadian Institute of Mortgage Brokers and Lenders, an organization that is itself preparing for changes to deal with the industry’s growth. “Mortgage brokerage is a more mature industry and, as such, brokers are looking for other referral sources. They’re approaching financial planners to seek co-op business ventures so they can mine each other’s businesses.”

The mortgage brokerage market is growing by about 10% a year, led by the so-called “Alt-A” market, which some industry estimates say has ballooned by 50% this year alone. These mortgage products are developed for Canadians who don’t normally fit into the risk profiles of most banks and, as a result, need alternatives. Clients might include new immigrants who don’t yet have a credit profile in Canada; the self-employed, who can’t provide regular income statements; and those who have had previous credit problems.

In the broadest definition, it may also include expensive, subprime products in which the lender essentially takes property as collateral.

“Compared with the U.S., Britain or Australia, we’ve been slower to evolve, in terms of the development of the Alternative-A lending products,” says Grewal, who is also president of Firstline Mortgages Inc. , which is owned by CIBC.

Financial planners and mortgage brokers find themselves on the same page more often each year, he adds. One is offering investment advice; the other offers liability advice. Occasionally, they’re both addressing similar larger financial planning needs.

“Collectively, they’re finding unique ways of meeting clients’ needs for both,” says Grewal. “You have storefront mortgage professionals and financial planners side by side. They’re offering a competitive business together because of their specialization.”

One much ballyhooed technique is called the “Smith manoeuvre” — named after Fraser Smith, an advisor in British Columbia who wrote a book dealing with why every advisor in the country should get to know the mortgage industry.

Here’s the basic deal: a client takes out an additional mortgage on his or her house to invest in a financial instrument, such as an income trust. The mortgage costs 5% in interest, and the income trust yields 8%. The client’s profit is the difference. At the same time, the Canada Revenue Agency allows the new mortgage payments to be deducted from taxes (see page B14). If a tax return comes from the CRA in spring, the money is put against the mortgage.

Advisors might think it’s madness to play around with debt in such a manner, but it’s a tool some Canadians are using in conjunction with a mortgage broker. Philip Boland, an advisor with Dundee Wealth Management Inc. in Toronto, says he considers the Smith manoeuvre in certain conservative instances.

Boland has had a 15-year business relationship with a mortgage broker that has developed further in recent years. Over the years, they’ve sent clients through each other’s doors. “I’m part of his team; he’s part of mine,” Boland says.

He admits he can’t possibly keep abreast of all the mortgage products that are available, so he refers his clients to Peter Majthenyi at Toronto-based Mortgage Architects Inc. Majthenyi advises on debt consolidation or ways to pay down debt quickly, for example.

“These days, you’re dealing with both sides of the balance sheets,” says Boland. “It’s important to have someone who can advise you on the best products. My clients might ask me about locking in rates. Peter can talk about the pros and cons of all the options.”

The connection with Majthenyi also allows Boland to pursue a more holistic planning practice. “When someone buys a house, he or she often finds that most of the money goes into the house,” notes Boland, who is a certified financial planner with mutual fund sales and insurance sales licences. “It gives me a great opportunity to sit down with someone to talk about saving, do insurance planning, estate planning, retirement planning. Mortgage is part of it.”

Majthenyi, who graduated with a degree in economics from McMaster University in Hamilton, Ont., and began his career at Midland Doherty Inc., traded in his securities licence to become a mortgage broker long ago, recognizing the opportunity.

@page_break@In the past, mortgage brokers needed good relationships with real estate brokers. Now, they need to have good relationships with financial planners, says Majthenyi: “It’s a must. Because people are focusing on their financial planning and there’s so many new products, mortgage brokers are finding the right place is to align themselves with financial planners and tax planners, so they have an ongoing relationship with a client. We’re not different from the financial planners.”

It helps that non-bank lenders and brokers proliferate today, he says, so planners don’t have to worry about sending mortgage-seeking clients to a local bank branch, which may offer rival investment products.

There is, however, a caveat for consumers dealing with the mortgage brokerage industry. Its regulation is best described as a “patchwork,” with B.C. and Alberta seen as having strong regulations. In other provinces, you simply need a business licence to open up shop as a mortgage broker.

In Alberta, the real estate and mortgage industry has been self-regulating for a decade, with the Real Estate Council of Alberta conducting disciplinary hearings for the mortgage industry. In Quebec, the industry falls generally under real estate brokerage legislation that was updated in 2004. Manitoba, New Brunswick, Prince Edward Island and the territories offer no specific governing legislation, while Ontario and Saskatchewan are in the process of amending their age-old laws. The Ontario Mortgage Brokers and Lenders Act is still awaiting its second reading at Queens Park. Ontario’s real estate regulation hadn’t been dusted off since 1971.

“Everybody is taking steps toward recognizing common education standards and proficiency,” says Grewal, noting CIMBL confers the accredited mortgage professional designation. “We’d love for the AMP designation to be mandatory. But I can’t comment on whether that will happen.”

In the meantime, Grewal says, the majority of mortgage brokers are constantly upgrading their skills: “What the AMP does is legitimize the education they have and give them a chance to meet a code of ethics and best practices. In the provinces, you have various degrees of awareness about it.”

Along with ushering in stronger ethical guidelines, Grewal will oversee the official changeover to a professional association in 2007, with CIMBL becoming the Canadian Association of Accredited Mortgage Professionals.

Various provincial and national industry associations offer basic training. Most mortgage brokerages or licensees offer courses to get rookies up and started. Vancouver-based Kendrik Canada Inc. , for example, offers specialized mortgage-related financial and sales training.

“We’re dealing in the marketplace with a difference consumer than we were 10 years ago,” says president Vicki Martin. “They have a base level of knowledge, and are looking for a professional who can take them to that next space.” IE