When someone is recommending SMSF property, make no mistake – they are getting paid! It’s just a question of who it is along the line and how much they are receiving.
When you buy a property from a real estate agent, the seller pays a commission and these fees typically range between 1.5% and 3% of the final purchase price. Real estate agents work exclusively for the seller to get the highest possible price.
When you buy property off the plan, things are not so transparent.
Off plan property is generally sold through what is known as project marketing. Like real estate agents, project marketers sell direct to the public, however unlike real estate agents they sell most of their properties through intermediary channels such as accountants, financial planners and finance brokers.
It’s important to mention that accountants, financial planners and finance brokers are not property experts and as such they are not permitted to give advice or recommend which property to buy or which market to invest in. They are however able to refer you to a project marketer.
As more and more “mum and dad” investors gear their self-managed superfund (SMSF) to buy property, it’s important that prospective investors understand the conflict of interest that plagues the property investment industry.
Unlike the modest commissions earned by real estate agents involved in established property sales, off plan property sales can attract commissions as high as 10%.
Current practice Australia-wide sees accountants, financial planners and finance brokers receiving a cut of these commissions either directly or indirectly from project marketers or developers, and in my view this is a clear conflict of interest that property investors need to be extremely wary of.
For example, if your accountant says that you are paying too much tax and thinks that negative gearing a property might be a solution then the logical thing would be for the accountant to recommend you to a financial planner to review your overall strategy.
Instead however, accountants are commonly introducing project marketers to their clients, and receiving commission anywhere from $10,000 – $50,000 off the back of every property deal.
For arguments sake, if your accountant provided you with an introduction to a stockbroker and that stockbroker then paid your accountant a $10,000 – $50,000 introduction fee, what would you think?
When any intermediary recommends a specific property or provides an introduction to real estate agents or project marketers, the first question you should be asking is “what is your cut?” By law, they are required to provide you with full disclosure on all commissions received. Asking this question will allow you to understand what is driving their advice, is it in your best interest or theirs?
The financial planning industry has just this financial year introduced FOFA (Future of Financial Advice), which was intended to improve the level of trust and confidence in the industry. One of the key initiatives was to establish a fee for service payment model thus moving away from commission-based earnings. This ensured impartial advice on asset allocation and overall financial strategies.
Any accountant or financial planner who receives commission from project marketers, and/or is strongly pushing a specific property or development, is not acting impartially and therefore has a conflict of interest. This is exactly what the recent FOFA change is trying to eliminate, yet this is happening every day either directly or indirectly – undisclosed.
This however is only one part of the story, as buyers should also be aware that purchasing property off the plan is the single riskiest way to invest in the residential property market.
Therefore, we are seeing situations where people are being given advice to buy property from either an accountant, financial planner or finance broker who are not licensed to give that advice, and are often naively placing your future at the mercy of a high risk investment – all for a cut of the sale commission.
For many people, this is your superannuation at risk. The quality and longevity of your retirement is not something you should be flirting with – you need to invest in assets, property or shares, with low risk attributes and always seek quality impartial advice.
There’s been a lot of press recently about investors losing money by gearing up and investing in property through their SMSF. The question is not whether property as an asset class is a safe investment vehicle, the problem is the poor advice and lack of care that vulnerable investors are subject to when buying property recommended by networks of service providers with a vested interest.