Greed or insanity? The financial advice industry is ignoring a key problem: Chris Bates
GUEST OBSERVATION
One of the biggest frustrations I have with the financial industry is the inability and general exclusion of property discussions by financial advisers and mortgage brokers alike.
I know this general lack of care and foresight in itself is affecting clients in life changing and sometimes irreparable ways. Whether they have not benefitted from the huge growth in the property market in the last five years as the adviser thought it was "too expensive", have unfortunately bought wrong assets with huge risks because they didn’t know who to ask, or they have gone ahead and not purchased anything at all because the adviser never discussed it with them.
One of the most cherished parts of my day to day role as a trusted adviser is to help my clients think through their property related decisions.
For example, this daily discussion could be helping my clients to understand whether they should or should not buy an investment property today, or when they want to buy a home in the future. It might be to discuss whether they should sell and buy a new family home or if it is better to renovate the one they live in today. It may be a strategic plan on how to build a multiple property portfolio over the next 30 years or it could be whether they should be buying a property at all.
All of these conversations are highly interesting and add huge measurable value in the future life of my clients. I love to help them think through their decisions and help them go deep in to the property market psyche. Let me be clear, this is not recommending individual properties on individual streets, but educating them on what drives the market and what type of properties suit their plan at this stage. I leave the hard work of finding the right property to professionals who know what they are doing - called buyer's agents. They are the ones who will find the right property to suit them long-term and not just today - not me.
Unfortunately however, I know I am rarity in the financial planning and mortgage industry. I would prefer that I wasn’t but due to being a financial planner, my previous experience in a property firm and also a mortgage broker I have had exposure to the many different areas of the property market. This experience while invaluable is also unique but I believe this should be a necessity and obligation for any aspiring financial planner.
Property has been an asset class that financial advisers have never had, and purposely not had, on their radar.
While completing initial qualifications it is barely mentioned and let alone tested in any way. The major financial institutions do not have any desire to encourage or educate their financial advisers to recommend property. To put simply, it would hurt their profits and shareholders would not like that.
Why has it not been discussed? Why have the majority of the advice industry decided to ignore a recommendation for over 20 years?
Internally within the industry, we all understand that the reason financial planners do not discuss it is because they do not get paid.
Financial planners have always been paid a commission for recommending investment share based products. If they recommended clients to purchase a property, they would not get paid. Sounds simple and maybe a rhetorical question; but is that advising or selling I ask?
If they recommended their client to consider purchasing a property and not shares, they would in affect rule themselves out of a nice paycheck today and to compound the issue further a lot of income in the future.
You see the ongoing fee package for the vast majority of financial planners is based on a percentage based fee. It is called an Asset Based Management Fee and has been around 1% for a long time.
Therefore, the more an adviser recommends for you to invest with them in shares and the less for you invest in property – the more money they make every year. If you a noticing a slight conflict here, you could be on to something?
To make you aware, there are legislation restrictions on advisers from recommending individual direct property and importantly professional indemnity insurance usually does not cover this advice. I am in complete and resounding support of advisers not recommending individual property. It would be highly conflicted and we are not the right people for the job in the first place.
Property is not an investment Australians would generally go to a financial planner to discuss. I would argue however that it one of the most important things they should be able to and need to discuss.
Property has been a great asset class for investors and homeowners. An important part and only a part of an adviser role is to help their clients to invest wisely, safely and in line with their future aspirations. The property market has been a great asset to help clients achieve their aspirations. But why do so many advisers choose to avoid this asset class entirely. In my eyes this should be called either insanity or greed. I’ll let you decide.
Lets put that to one side.
If financial planners are not advising property investors; where do they go?
Unfortunately the vast majority they make this key investment decision themselves. They may ask their friends and family what to do or quickly read a property education magazine, which is full of property developers selling property.
On first glance the property market seems simple, but the more clients understand it, they realise it is not as simple as everyone tends to believe. The first big mistake is that the property market is not one market. Just like the share market every property will perform very differently to every other property over the next 10 or 30 years. Some will do better than others, some will go down in value and some will go up significantly in value. Every property is different, that’s the biggest mistake.
What can be very complex to understand is also exponentially magnified, as the industry is unregulated. Every man, woman and their dog can sell property. They can tell you how amazing growth will be and how outstanding your rental yield is.
Three years ago I was telling clients to avoid mining towns like the plague and sure we all knew a crash was coming. There are houses selling at 20% of the value they were selling three years ago.
There are more horror stories of people buying the in the Docklands in Melbourne, Gold Coast and Noosa. There are fundamental risks with huge developments in apartment heaven near Sydney Airport.
You see people have bought all these properties, people are making all these horrible and life changing mistakes. They are real people and they are real losses.
Clients need guidance, clients need protection and clients need help. Unfortunately the property market can say whatever they want to say. Its buyers beware people.
For most Australians, their biggest asset is their home. Therefore their biggest investment decision would usually be the purchase or sale of their home. This decision alone will without doubt have huge impacts on their future wealth and prosperity. If a planner or mortgage broker is not skilled in talking about this decision nor makes an effort to help them with it then whom I ask does? Who are clients getting help from for the biggest financial decision in their life?
The issue I have is that very few planners or mortgage brokers are educating their clients on the property decision. Is it training, conflicted remuneration, education or general lack of care?
Unfortunately the consumer society we live in and the significant growth we have witnessed has caused all sorts of problems in the property market. We now believe that anything new is better than old, we now believe that the property market only goes up and we all watch the block thinking renovating and making money in property is simple. I argue however that all three of these are incredibly wrong.
The biggest reason why so many people have made money in property is not through buying smart but it is due to the fact that they have owned property in the first place. This feeling has made people think that any property will do and society pressure to get on the ladder is causing investors to take the line of least of resistance when purchasing. Something new.
The purchase or sale of the property is huge decision. This decision has a whole list of other decisions it also brings. There are hundreds of different strategies, issues and opportunities that an investor needs to understand and consider.
Chris Bates is a director at boutique financial advisors Canopy Private.