To recommend or not to recommend property? That is the question dividing opinions in the financial planning industry.
Whether it is because of a lack of commissions, the risk of legal action or a lack of knowledge about the property market, many advisers steer altogether clear of recommending property investments.
In particular, many will only provide advice for investing in financial products regulated by the Australian Securities and Investments Commission to ensure they are covered if anything goes wrong with the investment.
While there is an argument for taking this approach, it does not have the client’s best interests in mind because property is an essential component of any diversified investment portfolio.
Property investments not only provide tax benefits and a passive income, they can also be leveraged to a much higher degree than shares due to the safety lenders see with property.
Most people are able to invest in property using the equity that has built up in the family home. After a few years, the growth in the investment property can be used to fund a second investment, so it is possible to collect a portfolio of properties without the client ever having to use any of their own cash.
To not recommend property means clients miss out on a proven investment product, but it is little wonder advisers are cautious when lawsuits about property advice have been made against advisers in the past.
How to get to be the go-to
This issue could be resolved altogether, however, if property were regulated and in turn offered advisers the same degree of protection as if they were to recommend managed funds, for example.
For clients to get the best possible property advice, it needs to be a regulated product and advisers should also be able to receive a commission or charge for the advice. 
And, given the buyers advocacy industry is still in its infancy in Australia and many investors are not comfortable paying for this service, the financial planning industry has an opportunity to be the go-to industry for property advice.
A good adviser knows everything about a client’s financial world, which means they are in the best position to make recommendations based on the client’s overall goals and wealth accumulation strategy.
Over the past 120 years, property has proven to deliver substantial positive growth across long-term investments of 20 or so years. With such a strong track record, the financial planning industry owes it to Australian consumers to consider property as a key part of the investment mix.
There is constant debate about the performance of shares versus property. But the truth is they both have their cheer squads and nobody knows which will perform better going forward, so an optimal portfolio should have both.
It is for this very reason that property should be a regulated product so advisers can confidently recommend property as part of any diversified and strategic financial plan.
Michael Pesochinsky is co-founder and CEO of Melbourne-based financial advisory, property and investment firm, Full Circle Financial Group.
I couldn’t agree with your more Michael. Whether regulation is the requirement or some conviction in the advisor’s wanting to do the right thing for their client, property needs to be a potential part of every investor’s portfolio. Let’s not over look the diversity of cash flowing proprty overseas as well. This now takes property to yet another level where Australia’s currency strength plays a part whilst diversifying into another currency as a form of diversification. I can go on.
PIAA is seeking to take the real estate component out of Property Investment Advice and through the provision of PI insurance meet advice professionals such as Financial Planners with support for their clients with this unregulated product.
FOFA offers the Financial Planner the opportunity through their SOA to allocate capital to property, as an asset class, and then engage a Property Investment Advisor to support the client’s best interests through a property investment strategy. Included in this service is a standardised, advice-based, representation of information about property and its potential performance. This is created to support a foundation of realistic and transparent comparison of opportunities as opposed to the puffery of real estate claims.
Business fees for advice, or real estate services provided are on the table for FInancial Planners to participate in and fall inside their compliance framework.
The Property Investment Association of Australia is at the forefront of Property Investment Advice for Industry Professionals. Whilst having a Buyers agent license is ideal, providing quality Property Investment Advice is a complex process. PIAA has the only Property Investment Advice Course in Australia that has Professional Indemnity cover and is also active lobbying for regulation in this area. PI is a significant step for regulators. The course provides a great value proposition for investors and hence a Fee for Service arrangement.
Hi Michael – PIPA (Property Investment Professionals of Australia) of which I am a board member is lobbying for property investment advice to be regulated, so we hope it occurs. In the interim, only a Buyers Agent can come close to being independent fee for service in property selection. Any commission received by a planner or real estate agent from a developer or property seller is inherently conflicted just as financial product commission is. We are a Buyers Agency and find that more and more people are happy to pay for the service and we receive referrals from a number of planners. Planners who offer a wholistic service should find the best Buyers Agents in their area to find the appropriate property for their client. Just like planning is a specialist area, so is property and most planners would not have the resources to identify the best property growth areas and successfully negotiate a purchase.
Perhaps financial advisers steer clear of direct property because
(a) 80-90% are licensed via an institutionally owned dealer group, which has no interest in promoting direct property and just as importantly, has no PI cover for such advice,
and
(b) there is insufficient extra quantifiable return to compensate for the lack of liquidity, and
(c) its too lumpy to fit in a “balanced” portfolio.
Regulating property (managers) is the best thing that can happen. Both financial planning and property advise will benefit from it.
How realistic is it though that this will happen short term?
Should this also then mean that real estate agents who say things to lure potential buyers to sign a contract, should also be regulated. I can hear the cheers from the industry already if we are finally going to bring this sector into our world.
I’ve always wondered how a real estate agent can make such unqualified comments to potential buyers without also having to give a reasonable basis and disclose their own commissions.
Here, here….
Direct property is always the elephant in the room when advisers are talking to clients about investing.
For the financial planning industry to have real credibility, direct property must be bought within reach of advisers.
For clients to have a genuinely balanced investment portfolio it must contain some direct property.
Advisers and client miss out while the industry fails to find a way to bring direct property within reach of advisers.