“Successful investing is about managing risk, not avoiding it.”
— Benjamin Graham
Managing the appeal of real property
According to the ABS approximately 2.02m households in 2019-20 owned a residential property outside of their usual residence. Add to these figures business real property and commercial property means the likelihood of an adviser meeting with clients who own an investment property, regardless of type, is not uncommon.
During initial meetings with prospective clients, advisers are often confronted with the following questions:
- How do we use our super to buy an investment property?
- How can our current investment property (or properties) become part of our retirement plan?
- Should we sell our investment properties?
- Can you help me set up an SMSF to purchase a property?
We often see files where it is clear that the adviser is unsure how to approach these situations in terms of framing the adviser’s service offering and how to handle property when it becomes part of the scope, and subject matter, of the advice.
In this article, we aim to burst the top 3 myths when providing advice relating to property.
Myth 1 – I am unable to advise on property so I scope it out
Real property is generally not a “financial product” under the Corporations Act, but it can be (as a result of structure, custody and distribution) or become part of regulated financial product advice (as a result of the source of acquisition funds, the structure or the association between the adviser and the vendor).
Although they’re generally comfortable with listed property or managed property funds, most licensees don’t explicitly authorise advisers to provide advice on direct property because they don’t have the systems to facilitate direct property recommendations, the research to support direct property recommendations or the confidence that their advisers have the competency and capability to deal with the complexity and conflicts associated with direct property recommendations. When you factor in state based regulations, the opacity of property valuations and the heightened regulatory risk (and increased financial liability) they’d assume, their preference to limit their representatives focus to managed investment schemes and regulated arrangements is entirely reasonable.
Whilst direct property may be scoped out from an authorisation perspective, this doesn’t mean an adviser can simply ignore it – particularly when it is a critical part of their clients’ relevant personal circumstances.
If you are an adviser, you have an obligation to identify your clients’ objectives, financial situation, needs and the subject matter of advice. If your client expresses a goal to purchase property personally, or within a structure, or asks whether they should sell or keep their property, you cannot pretend this conversation didn’t happen and simply exclude direct property from consideration.
Remember, in the context of wealth creation and retirement planning, an adviser can provide strategic advice in relation to property without providing advice on the underlying asset. You can provide property-adjacent advice; addressing cashflow, asset allocation, levels of debt, loan repayment types and exit strategies. An inability to provide specific advice on direct property does not allow you to ignore your clients declared intention to purchase, retain or sell property.
So, don’t scope it out entirely, clearly define the limits of your consideration. Even though you can’t advise on direct property, you need to contemplate (and address) the consequences and implications of their commitment to that investment and its impact on their needs, objectives and broader strategies.
Myth 2 – The client had an existing property in the SMSF before meeting the adviser hence the SMSF is automatically an appropriate strategy
Whether or not a client had a property in their SMSF prior to becoming a Financial Planning Client or whether the clients’ goal was to set up an SMSF with the intention of purchasing a property, the adviser has an obligation to advise on the appropriateness of this strategy.
This is because the vehicle through which the underlying investment is made is an SMSF and an interest in an SMSF is a financial product. That is, a person who makes such a recommendation or statement of opinion provides financial product advice even where the underlying investment (i.e. real property in this case) is not a financial product.
”It doesn’t matter that the underlying investment is real property. It doesn’t matter that the underlying investment is diamonds or artwork or foreign wine or anything else. It’s the fact that the advice is about using your superannuation in a particular way, or establishing an SMSF to invest in a particular way, that makes it financial product advice”.
The assessment of the ongoing suitability and appropriateness of an SMSF needs to be affirmed and how the strategy being adopted is linked to the clients objectives and how they may actually be achieved, needs to be clearly articulated. If the adviser deems an SMSF is a suitable structure to be retained, the viability of the property strategy, whether associated with an LRBA or not, can be modelled and analysed.
Just because a client may have experienced high entry costs to acquire the SMSF and acquire a property, the ongoing costs to maintain the strategy and the broader and long term interests of the client need to be taken into account. If the property strategy is working well, this can be affirmed, if it is not working well, and the client’s objectives are unlikely to be achieved, there is an obligation to alert the clients in this regard and strategic alternatives can be canvassed. If the trustee is specifically not seeking advice on their property investments, then an SOA needs to be structured to confirm that they have the capability to manage it themselves.
Myth 3 – I am unable to advise on when to sell investment properties or a principle place of residence
A deleveraging strategy is a legitimate strategy which can be advised upon.
Some clients have multiple properties with varying levels of debt they seek to unwind from immediately preceding or reaching their retirement. Others may have had significant changes in their personal circumstances such as the loss of a job, unexpected health challenges, death in the family which require deleveraging advice.
The implications in relation to the timing of the disposal of property such as the crystallisation of gains and losses and the meeting of legislative requirements such as downsizing rules and small business CGT rollover relief strategies can be strategically advised upon.
The overall key to the clarification of these myths is the adviser’s service and value proposition. Assured Support can help advise on the necessary skills, tools and competencies required to confidently provide strategic advice in relation to property within your own or your licensees risk framework.