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.
