One of the biggest industry compliance issues leaving advisers unstuck is the lack of clarity and transparency in the separation between product sales and advice, which means potentially steered investment advice to products, which may provide a greater interest to the planner than to the client.
This issue is just as relevant when providing advice on the direct property asset class which, much to the detriment of the client, many financial planners completely avoid due to the lack of regulation around this non-financial product. This is also steered by the apprehension of dealer groups to go down the property route due to the limited coverage of their professional indemnity (PI) insurances.
Despite these hesitations, property investment has been one of the major wealth creation channels Australians turn to due to their familiarity with this asset class in comparison to managed funds and shares.
In saying that, direct property, like all investments, has its strengths and weaknesses.
These advantages can include income and growth potential, complete control by the client over a tangible asset, tax benefits, and negative gearing options. On the downside, property also comes with the disadvantages of illiquidity, high acquisition and disposal costs, capital gains taxes, and potential land taxes, which may be applicable.
Over the last few years, the financial advice industry has seen an increase in the number of financial planners engaging in the direct property arena. It is important to ensure the direct property asset class is a consideration within an adviser’s service offering and part of the financial strategy for suitable clients as it can offer true asset diversification, tax effectiveness and fulfil client demand, especially with regards to SMSF investors.
COMPLIANT MODEL
Where a financial planner does provide general advice or investment fundamentals based advice on the direct property asset class, they should limit advice to suitability of investment as part of an overarching wealth building and diversification strategy, maintaining a clear separation of advice and product and providing full fee disclosure in their financial services guide. Financial planners can come unstuck when they become involved in property selection, rather than advising on affordability and strategy based on the clients tailored needs. For this reason, outsourcing is one of the most compliant strategies in property selection.
The following outlines one example of the process advisers should take when referring property selection to an experienced third-party property adviser, real estate agent or buyers advocate:
Step 1: Assess client interest
Step 2: Fact find (in addition to your normal fact find)
Step 3: Loan servicing – this is an important step before progressing as it assesses a client’s borrowing capacity and the maximum they can afford
Step 4: SOA ordered – utilising the fact find and loan servicing, an SOA can be ordered or produced internally. No specific property is referred in the SOA, rather it is a generic example
Step 5: SOA presented – this is a non-product based SOA. The client then signs an “Authority to Refer” to a real estate agent to assist with property selection, rather than the traditional “Authority to Proceed”
Step 6: Client referred to real estate agent along with the supporting information
Note that at no stage during this process is a specific property which fits their requirements ever discussed
Mireille Salloum is an investment property adviser with Examine Property, a boutique property investment firm which works with financial planners and investors to find suitable property investment options.
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