I really wish I had a dollar for every time we have heard this from a financial adviser.
I would be so rich that I would need a team of financial advisers to help me plan what to do with all that money. For one thing, I would be looking for an adviser that DID advise on direct property (as an asset class) and all other asset classes for that matter. Not to mention being strong on the strategic advice that brings it all together.
In my experience, there are two reasons for this answer. One is a general misconception that we are asking financial advisers to market or sell a particular property to their clients. This is a common approach from project marketers dressed up as property advisers. I also receive those emails promising big commissions to an email address attached to my old financial planning business. In that case, the answer is valid and financial advisers should not be involved in recommending a particular direct property to clients. All reputable financial advisers know the reasons why.
The Royal Commission has further driven that message home. Finally, ASIC and the ATO have also announced a crack-down on One Stop Shops.
From an asset class perspective, why shouldn’t a financial planner advise on the direct property asset class? Direct property is a legitimate asset class and one of the most common class of assets Australians invest in. The ATO advised recently that well over two million tax payers have a property or more in their portfolio. Are mortgage brokers or even real estate agents better placed to advise on the suitability of direct property for a client’s financial needs? Of course not. However, this is where many investors are getting their advice from.
One reason is that many financial planners “don’t advise on direct property”. This leaves their clients to work it out for themselves or worse still, fall into the hands of businesses who are not acting in the best interests of the client. Remember, a traditional real estate agent or project marketer acts in the best interest of the vendor, not the buyer. Even some buyers’ agents charge the client a fee for the advice, then lump them with a house and lack package or off the plan apartment where they are getting illegal kickbacks. They structure these as“marketing fees” not agency commissions. It is illegal to do so, but that does not mean it is not common place. I saw an FGS recently that was sent to clients from a less than credible financial planning business where they charge for property advice, then accept vendors commission and then rebate the property advice fees back to the client. This is illegal under real estate law. However, ASIC gave this FSG their blessing. No wonder advisers are confused when the regulator doesn’t know even know the law.
I am yet to find a single dealer group that doesn’t allow their AR’s to advise on the direct property asset class.
In fact, the leading industry professional body has many times mentioned that ignoring the direct property asset class is NOT in the best interest of the client. Although when we asked recently if this premier industry body had a policy on direct property, we were advised they did not. No professional including an accountant, is better placed than a financial adviser, to advise on the direct property asset class and whether (or not) it suits the client’s financial strategy. Include in that brokers, vendors agent and even buyers’ agents.
However, they are doing it, and nothing is being done about it. ASIC has no jurisdiction over real estate agents. The NSW Department of Fair Trading has banned payments for property referrals to financial planners, accountants, mortgage brokers and any other professional. However, if the referral partner attains a corporate real estate license, it becomes alright to receive payment. How is this improving the quality of advice to clients? It is raising revenue for the state government and while looking like they are “doing something”.
Where it becomes a grey area is when referral fee payments (conflicted renumeration), whether from external parties or in-house property divisions, are involved. I can tell you the advisers getting dragged over the coals by ASIC at the moment mainly have in-house property divisions where either directorship, shareholding or referral fees (or combination of all) were not disclosed to the client. Having your own real estate solution in-house is riskier as you are now responsible for the asset selection and it still requires full disclosure.
Compliance is key. One Stop Shops being under the microscopes is way overdue. The concern is where it starts with the product. In this case, the property which is often marketed at events like seminars. Once there is interest from the client, they then are put in front of the internal or associated financial adviser to come up with the advice to facilitate the purchase of the product (the preselected property). There have been releases from ASIC, namely Regulatory Guide 246 that specifically mention this business model, especially around SMSF’s. They have mentioned payments from developers as conflicted renumeration when it comes to SMSF advice, but I take that as all renumeration whether from a developer, builder, real estate agent or even a buyer’s agent.
Consult your own dealer group or the RM if in a self-licensed practice as to their interpretation. Again, it is not clear and there is no consensus in the industry. What else could we expect in this space? Clarity? I am yet to see it.We have recently after months of due diligence, been rewarded with the exclusive opportunity to service the clients of a brand name dealer group. When their compliance team asked for detailed information about our research and methodology, I was pleasantly surprised. I found it refreshing they were interested in the quality of the property advice, not just compliance. The best compliance process will not save the client or the adviser from a poor choice of property.
Unfortunately, with property, it can take a long time to realise that the particular property is a dud investment. There are no stop losses to minimise the damage. It is expensive to exit, much more than $20 brokerage fee. The advisers and this dealer group WILL NOT be paid any referral fees from Examine Property. They saw value in the service and the education we provide. They had an existing and longstanding request from their AR’s to find a solution suitable for the clients. After searching far and wide, they were not able to find a reputable company to work with. Not surprising at all. An opportune meeting with one of our team at a networking event started a long due diligence process and we were finally entrusted to service their client base.
Finally, the most important reason to get involved in the advice is client best interest. You can save them from making a mistake they may never recover from financially, not to mention emotionally. The financial adviser is often left to pick up the pieces and try and either unwind bad investments or adjust financial goals and plans as a result. As an example, if a client is having to attribute large portions of their income to an underperforming property, it will affect their ability to fund their insurances or to make additional contributions to superannuation. The implications are many. Even if you never choose to refer to a reputable property specialist, at least give the asset class advice or check what they are getting themselves into.
I don’t hold out hope that will not encounter the “we don’t advise on direct property” objection any time soon. However, we will continue to dispel this misconception through accredited education, ethics and industry leading direct property advice and client education. If you want to know about compliance in this space, we regularly run CPD accredited webinars and face to face educational events for financial advisers.
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Some feedback from your colleagues on these events include:
“Thought it was an extremely well thought out, well presented webinar”
“I now understand why you are trusted by various dealer groups and how you achieved CPD accreditation for your education on compliance. That was excellent”
“Great work guys. Please email me a copy of the slides to revisit if possible”
“You made a dry yet important topic interesting! The information on the 18 Year Cycle at the end was new to me. I will dig deeper on that one”
