The modern advice model is about developing strategies for superannuation and non-superannuation structures, and recommending investments to meet those strategies. On all new business, you charge a fee commensurate with time taken and your expertise, negotiated with your client and modelled on a FUM, fixed retainer, time spent or a combination of these.
While the investment universe you can use with clients might cover a range of asset classes and investments – direct or managed – you might not be able to include direct property unless you have a real estate license. If this increasingly limits your scope to offer advice on selected products, particularly with SMSF trustees who want property, there is a solution. It could also significantly increase your fee basket, either by way of increasing FUM or enabling you to increase your fixed fee or add a time charge.
Fractional property investing is not a new concept but the application to residential and commercial property in Australia is. Having fractional investing into property available through an MIS (managed investment scheme) structure or platform enables you to advise on property as part of standard portfolio construction, under your current license or authorisation.
The unique part of the fractional model is that your client can choose the specific property they want, based on property type and geographic location. Because the investment can be fractional, meaning not all of a property must be purchased, the client can buy without borrowing. The fractional model will also be available in a platform and in a managed account form, so you get the same high level of administrative efficiency that you’re used to.
Technology has played a part in this development, by enabling this concept of fractional investing, which is similar to that of the equities market, to be applied to property. The fractional model offers more liquidity than other forms of property investment, as a secondary market will be created to allow online trades between buyers and sellers.
Investor benefits include income from rental yields, a share of future capital value, increased liquidity, potential diversification across multiple properties and an asset allocation solution. Further, no more will your investors have to establish a LRBA (limited recourse borrowing arrangement) just to get into a property.
Those SMSFs with an excessively high percentage of property in their portfolio will have the option of selling down a percentage, perhaps to other SMSF trustees, to avoid a liquidity crisis as they approach pension mode. Commercial property portfolios too will be able to increase liquidity by registering specific properties on the platform for more direct investment.
The fractional model also has significant equity release potential and future models will enable senior Australians to share their property with the next generation of investors, while they unlock equity to help fund their retirement years. For the first time, the emergence of fractional property investment will provide a sustainable equity release model for this cohort and bring the family home into the strategies you develop and hence into your fee basket.
Fractional investing into property can be used to encourage younger generations to get their foot on the property ladder, converting savings into units in real property of their choice – tracking the property market rather than the interest market. It therefore has the potential to extend the advisers reach in terms of new clients at both ends of the age spectrum.
Advisers potentially already have both vendors and investors on their books, so it is not unreasonable to see revenue potential within your existing client pool.
The bottom line is whatever property is chosen, it forms part of the client’s FUM, hence rightly increasing your potential fee basket.
The fractional property investing model provides an elegant solution for a number of scenarios, each of which has the potential to create a new type of client for you, and fits nicely into your fee for service proposition.
The emerging fractional property investing model changes the asset allocation to property and places choice into your hands and those of your client, as well as bringing a degree of regulation to the property sector in a way that has not been previously seen.
Warren brings 29 years of financial services knowledge and experience to DomaCom together with a passion to build markets and deliver exciting new developments to financial advisers and their clients.
