Clients need property knowledge

The number of Australian investors looking to buy an investment property will continue to grow, but an advisory firm’s first-hand experience has revealed clients do not understand the process clearly, believe it is easy and are interested for the wrong reasons.

According to James Williamson, owner of Millhaven Financial Services, the lack of clients’ education in all facets of property has become increasingly apparent over the past 12 months.

“The one thing I’ve noticed is that there’s a lack of knowledge from clients in terms of what the process actually involves so there’s a real education part to the process [missing],” he says.

“Many believe that it’s as simple as perhaps just buying the old negatively geared property – the old way of buying property – and I don’t think they realise some of the speed humps along the path.”

Williamson says this realisation then leads into the bigger question around diversification.

“If a client turns up and says, ‘This is what I want to do’ and it’s client-directed, that’s fine from a compliance point of view. We are able to act,” he says.

“But if they’re asking advice from us, it’s very much having that diversification conversation: Is it appropriate to have 80 per cent of your self-managed super fund invested in property?

“There’s not necessarily a right or wrong answer to that, it’s about what’s appropriate for the client.”

Williamson says clients also aren’t familiar with the Superannuation Industry (Supervision) Act 1993 (SIS).

“The holiday home question still gets asked.”

Sean Preece, chief executive officer of Ironstone Group, says that the complexity of residential property is becoming far greater “to the point where it’s not just ‘pick and hope’ anymore”.

“There is a lot more work that needs to be done around that,” he says.

Capital 360, the group’s residential property advisory arm, matches the best possible property fit to a client’s overall investment strategy.

Preece says many of his clients approach him with a mentality of: “I can go buy an investment unit, nothing can go wrong and if I hold on long enough, I’m going to make money.”

“I think historically, that was sort of half true but especially moving forward, as our economy grows, as our market grows, the chances of error in that regard will increase dramatically.

  “Especially when you’re looking at a self-managed super environment where if you do make mistakes, the consequences can be far more significant both financially and practically.” Williamson says that while investors continue to embrace property, they need to focus on their objectives at the outset. “It’s still imperative that you get the right property or the right asset,” he says. “And just putting a property under a geared environment is not going to do the job for you. So it’s no different to what share you buy or what fixed interest product you have.” Preece says that during the “old negative gearing days”, people bought property for the novelty of negative gearing. “You just lost perspective on exactly what you were doing,” he says. “And we often have to bring that reality check back to people and say, ‘Look, we understand what you’re trying to achieve so let’s focus on that and let’s get the right solution for that’. “Whether it’s in super, outside super, whatever the case might be, they’re the solutions, let’s look at what the objectives are first of all.” Craig Morgan, managing director of SMSF Loans, says clients need to stop thinking about property “as a piece of real estate and start thinking about it as a financial product and you’ll be in the right headspace”. According to Preece, the process of buying property shouldn’t be thought of as a transaction. “It’s a process: there is a pre-component and a post-component to it,” he says. “The ‘pre’ is heavily around research and knowledge and the ‘post’ is around maintaining, managing and reviewing your portfolio. “We’ve applied the same sort of logic [to our strategy] that you apply to identifying an equity or a fixed interest product or various other asset classes…to residential property.” Williamson says that each of the key players involved in the property process - the financial adviser, accountant and lawyer - need to ensure that they guide the client through every step personally, as well as collectively. “I think it’s really important that you try and bring all those advisers together,” he says. “It can be an extremely disjointed process otherwise. “So if you can get everyone on the same page and working together, it certainly makes a big difference.”