Christmas and New Year is a common period for business owners to take some time off, assess the year that was and plan for success in the future. This year it seems a number of investment property specialists decided to work through the break and contact potential customers who should have been otherwise occupied with family and friends.
I try to be polite when I’m Cold Called (or spammed via LinkedIn which seems to be the new cold contact platform) because i know sales can be a daunting industry. I listened intently to their pitch before declining. For one of these callers it was their lucky day, my lovely wife answered the phone. This is where the problem that led to this article started. Within five minutes the caller had all but convinced my wife we should be looking at a financial investment product, a rental property. After the call had ended it took me far longer to fill in the gaps and paint a complete picture of what had just transpired. The conversation ended with “you need to make sure people know this stuff!”. So, in the spirit of ‘happy wife happy life’ my first article for 2017 will do just that…
Regulation of Financial Investments
Financial investment products (shares, savings accounts etc) are heavily regulated in Australia. What do i mean by regulated? Anyone who wants to invest your savings for you must either hold an Australian Financial Services License (AFSL) or be authorised by someone who does to give advice on their behalf. If you walk into any financial planner’s office in Australia the person sitting across the table from you must be appropriately qualified and authorised before they can even make a recommendation on which bank account to open.
There is one notable exception which is free from regulation – Investment Properties. That’s right, as a tax advisor I cannot recommend you open a savings account with Westpac but i can recommend a $1,000,000 investment property. I can even refer you to a mortgage broker who pays me a commission with no real obligation to tell you I’m receiving that payment. See the potential for an issue here? In the absence of regulation we are unprotected.
A Clear Conflict of Interest
Many year ago the Financial Planning industry as a whole had a major problem. Financial planners and investment brokers were able to line their own pockets by ignoring what was best for their clients and focusing on the investment products that paid them the largest commissions. The industry is now far more regulated and financial planners are no longer allowed to take payments from product providers. As the customer you pay them a fee for their advice and any payments your financial planner receives from the investment provider must go to you. There are a couple of exceptions, insurance products for example, but for the most part the conflict of interest has been reduced or removed.
Property Investments have not kept up with the times. Most ‘Property Investment Specialists’ are actually mortgage brokers who clearly benefit financially from every loan they can secure. What is the easiest way to sign someone up for a large investment loan? Convince them they need an investment property which they cannot possibly afford without the loan. They may also receive commissions from property developers for the sale of properties. Particularly with off-the-plan developments.
The total amount received by an Investment Property Specialist can include some or all of the following:
- Advice and education fees – paid directly by you, the client;
- Commissions from the lenders for bringing in the loan – you do not see this transaction;
- Commissions for the sale of the property itself – again, you do not see this transaction.
For me this creates a clear conflict of interest. Receiving undisclosed payments from a third party for advice given to a paying client is a major problem. It is no different to the issue that plagued the financial planning industry. The problem resulted in huge investment losses for clients back then and it will again.
Taking the conflict of Interest to a new level
There is actually another tier to the industry. The larger ‘one stop shop’ players in the market who are also the property developer and the construction company. They do not stop at recommending you buy a property and writing the loan. They also build the house for you inside a sub-development they are in complete control of. Their hands are in your pocket from the moment you call them right through until you have the keys to the property.
Strategy Before Product
Lets step away from the fees and licensing issues and look more generally at financial strategy. When a potential client is seeking advice on investments a good financial planner will build a strategy based on all the information gathered about the client. Information like Age, Household income, Occupation and desired income in retirement is gathered and analysed. They may even go as far as requesting a blood test depending on what products will be discussed. Anyone who has ever engaged a financial planner will be familiar with this. Based on all the information they build a financial strategy which has been customised to the client’s specific needs. Once the strategy is in place they look for investment products (shares, cash savings, property etc) to meet the needs outlined in the strategy.
The strategy MUST come before the product recommendations!
My issue with the property investment industry from this perspective is that they only have one product, an investment property. No consideration is given to other options because more often than not the person giving you the advice cannot legally talk about any other alternatives. The strategy is the same for every client regardless of their personal situation.
Should you buy an Investment Property?
As with any investment option available to you the answer is maybe. That may not be the clear, definitive yes/no answer people who work with me are used to receiving. It is the right answer none-the-less. Why maybe? Because an investment property is a great choice for the right person. The trick is determining if you are the right person. I don’t know enough about you at this point in time to make that determination and neither does the Investment property specialist that is going to cold call you next week!
Quality, independent advice is key in planning your long term financial future. If an independent advisor recommends an investment property then call a property investment specialist and get the ball rolling. However, do not buy anything without the advice and a clear, customised strategy.
Looking for some advice? Nick Webb of Stonehouse looks after all of my personal investments needs.
Considering an investment property and want to discuss tax? Lets Chat!