Loan pre-approvals by banks can be confusing. They aren't a rubber stamp to buy whatever you want, but some buyers are being a little too cautious.
Monique: conflicted SMSF property advice must go
In June the Minister for Financial Services and Superannuation, Bill Shorten, announced that the Future of Financial Advice reforms had passed into law.
At the time, the Minister claimed that “as a result of the measures passed by the Senate today, every Australian consumer can be more confident that their financial planner or adviser is putting customers’ interests first and that the advice they receive is not influenced by sales commissions.”
I wholeheartedly endorse these principles and the compulsory banning of commission fees that comes into effect in July 2013. Unfortunately and to my mind, unfathomably, the Minister decided to exclude property transactions from the scope of the rules.
The omission is particularly troublesome and poorly timed given the Australian Tax Office’s recent relaxation of the borrowing and renovation restrictions for property bought within a self-managed super fund.
We now have the altogether predictable situation where recalcitrant accountants and financial advisers – those who fear to or aren’t able to evolve their business to a world where their income is based on fee-for-advice rather than commissions – gravitate to the new gravy train of promoting property developments to their clients in return for a commission from the property developer.
As is always the way, the more marginal and compromised the investment prospect, the higher the commissions that the originators of the scheme have to conjure up to overcome less principled advisers’ limited scruples about jeopardising their clients’ interests. With some developers offering referral fees of 10% on half million dollar properties, we shouldn’t be surprised that so many accountants and financial advisers are tempted.
Of course, many of these advisers use the hoary old fig-leaf of a justification that they disclose the relationship with the developer and the size of the referral fee to their clients. In some instances this claim is disingenuous at best, with the disclosure buried deep in the fine print of the client’s paperwork.
But more fundamentally, I question whether accountants and financial advisers should be in the space of recommending property to clients, even if they disclose fully and even if they operate on a fee-for-service basis.
Accountants and financial advisers are not investment property advisers. Asset selection is a speciality. It literally takes years to build the knowledge and expertise about what drives the asset class and the characteristics of good investments, including the locations and property types that deliver a superior return. Investment property advisers don’t claim to be experts on financial products. We wouldn’t dream of providing advice on how to structure a self managed super fund or a share portfolio, but rather recommend clients obtain independent advice from a reputable qualified accountant or financial adviser.
Quite simply, regardless of disclosure, they are not qualified to deliver a well-informed recommendation that involves a client spending hundreds of thousands of dollars on property – and it’s hubris to think otherwise.
So if you happen to be across the table from an accountant or financial adviser who wants to float the idea of you investing your super in property, be prepared to ask them some hard questions.
Are they receiving a commission for referring clients to a particular development and if so, how much? How did they assess the development as a good investment? Did the developer contact them in the first instance? Where is the evidence of a track record of strong and sustained capital growth within the proposed development or similar developments in the area to justify their belief in the opportunity?
Of course, property developers need to take responsibility as well. It’s now rare to find marketing material from a new property development that doesn’t include content targeted at SMSF investors. However, at least we know that a developer is just trying to sell us something – it’s what they do. But we have a reasonable expectation that our accountant or financial adviser will put our interest first, and not their own.
And if they are in the business of property investment advice, they should actually understand the asset class’s fundamental characteristics as they exist distinctly from those that govern the stock market, especially given the unforgiving nature of mistakes made within the DIY super structure.
(An abridged version of this column first appeared in the Wealth section of The Australian)