Some words of advice

Investor lending is growing much more rapidly than owner-occupied finance. According to the Australian Bureau of Statistics (ABS), investor lending grew by 20.6 per cent for the 12 months to 31 March 2015, compared to 12.4 per cent for owner- occupiers.

Owner-occupiers tend to shop with their heart, while investors shop with their head, which gives brokers an opportunity to capitalise on demand for property advice. Margaret Lomas, broker and director of Destiny Financial Solutions, and board member of Property Investment Professionals of Australia (PIPA), spends her days educating property investors on what, where and how to buy.

Ms Lomas believes offering property advice will go a long way in ensuring the clients of brokers are not just one-offs.

“Competition for the broker business is at an all-time high, and consumers are notoriously disloyal to their broker – they need to have a good reason to continue to use the broker over and over again,” she said.

“While it’s easy to think that the reason will be that you provide great service, many brokers do, and so you need an edge.”

As the underlying motivation behind a client wanting a loan is property, Ms Lomas says being able to operate as a qualified property adviser will set you apart from the other brokers.

“More and more property buyers are, or will at some time become, a property investor too,” she says. “Those brokers able to offer a qualification in property investment advising are more likely to retain client business.”

Ben Kingsley is one broker who realises the benefits of offering property advice alongside home loans.

As chair of PIPA and CEO of Empower Wealth Property Advisory, Mr Kingsley says property investment advice sits nicely next to mortgage broking.

“In fact, by developing your expertise in property investment advice, you can provide your clients with a more comprehensive service offering,” he says.

“There are growing numbers of brokers incorporating property advice into their business – I’m one of them.

“Lending is a fundamental component of most property investment actions, so there is definitely a huge opportunity for brokers with multiple skill sets to expand their services in the property investment space,” Mr Kingsley says.

And there is certainly demand for this service. According to a survey conducted last year by PIPA and The Adviser’s sister publication, Smart Property Investment, more than 30 per cent of investors seek out the advice of a property investment adviser.

However, Mr Kingsley warns that anyone looking to offer a vertically integrated model of lending and property advice should be very transparent in their offerings.

He says businesses that offer a choice of loan options and property strategy options don’t have to worry about any issues surrounding a conflict of interest between them and their clients.

Be careful what you say

Although property advising may seem like it only has upsides, there are dangers that brokers need to be aware of.

Ms Lomas says property advisers need to understand the limitations of what their qualification allows them to provide.

“The danger is in stepping outside of the boundary and giving personal financial advice instead of pure property advice,” she explains.

“Any advice which suggests how a client should use personal cash is considered to be financial advice. Any advice to disinvest – such as advice to sell shares in order to buy property – is considered financial advice. Any advice suggesting how to use self-managed superannuation funds is considered financial advice. All of these require a financial advising qualification.”

Ms Lomas says property advisers should also consider the personal financial circumstances of their clients and understand that not all property suits all buyers.

And just like broking, the property advice industry has its very own cowboys, known as ‘spruikers’.

Because the property advice industry is not regulated, there is no minimum qualification required to provide advice, so anyone can call themselves a property adviser. This makes it difficult to distinguish between an adviser and a spruiker.

From PIPA’s perspective, a spruiker will sell property and charge hefty commissions to the developer, which are not disclosed to the buyer. This means the buyer overpays for the property when the developer funds these commissions by increasing the purchase price.

Spruikers rarely consider personal circumstances when making recommendations, and might also conduct expensive boot camps and workshops designed to encourage participants to invest in available stock, which is often overpriced and rarely suitable for the circumstances of a buyer.

“Qualified advisers charge for their services with disclosed fees, or they acquire commissions and fully disclose these to the buyer,” Ms Lomas says. “They also become members of PIPA and subscribe to our code of practice.”

Mr Kingsley says the fact that this industry is not regulated poses a significant danger to customers, given that property is often the most expensive type of transaction for investors.

“This means that anyone is free to potentially provide property investment advice without any qualifications or credentials or even genuine experience,” he says.

“The lack of regulation is even more disquieting given the interest in property investment via self-managed super funds.”

As a result, PIPA is actively lobbying the federal government to create a regulatory framework for property investment advice.

“Our proposal is that property, when purchased as an investment, be recognised by the law as a financial product, and therefore any advice pertaining to property as an investment be subject to a full regulatory framework,” Mr Kingsley says.

“Anyone advising on the recommendation to invest in property should be formally educated and trained to do so – even financial planners, accountants and mortgage brokers.”

While property spruiking is threatening the ethics of offering advice to customers, another and more contentious issue facing the property industry is brokers receiving incentives from developers.

Ms Lomas says undisclosed kickbacks are dishonest and underhanded.

“They should never be allowed, and they lead innocent buyers to buy property over the market value, thus obtaining an asset which has little chance of delivering suitable return and growth over time,” she says.

“I find it sneaky in the extreme and the government should be ashamed that they are doing nothing to stop it taking place.”

Mr Kingsley says PIPA’s position is that just like lending, some members do work under a commission or kickback or referral fee model, which is acceptable so long as the consumer is fully informed of all payments being made between the parties.

“The NCCP requires brokers to act in the best interests of clients and to disclose all conflicts of interest and any commissions from other products where credit is being provided,” he says.

“PIPA members also adhere to a strict code of conduct and disclosure policy, ensuring investors are well informed of all payment processes and any commission arrangements.”

Mr Kingsley says it is also important to note that PIPA is concerned with any excessive kickbacks on investment property sales, but so long as these are disclosed to the investor, it is up to the consumer to determine whether they see that as a fair arrangement and value for money.

“In other words, if someone presented me with a disclosure that a $50,000 payment was being made to the adviser based on the recommendation to purchase a $500,000 property, this large amount would need an incredibly detailed reasoning as to why such a large percentage fee is value for money,” he says.

If you are going to refer clients to any developer or builder and receive a commission, there are ways you can distinguish yourself from dubious operators, according to Mr Kingsley.

“Be sure to fully disclose any commissions and only deal with reputable developers. You should be confident that they are offering your client a good product – not just doing it for the financial kickback,” he says.

“As a good rule of thumb, fees ranging from one per cent to five per cent may be more in line with the level of detail and value they add through their advisory services.”

Education and support

While some brokers might already incorporate property advice as part of their product and service offering, Mr Kingsley says it is typically unqualified.

“And although most are well intentioned, their property investment advice is without genuine qualification or expertise,” he adds.

PIPA is a non-profit member association that represents professionals working in the property investment industry, and has developed a formal qualification for those looking to provide property investment advice.

Mr Kingsley says the Qualified Property Investment Adviser (QPIA) course can provide brokers with industry-recognised accreditation and the knowledge they need to provide ethical and professional advice.

“The course has a flexible, self-paced structure, which enables professionals to complete six modules at a pace that is suitable for them,” he explains.

“PIPA also recognises professionals’ existing skills and will consider applications for recognition of prior learning. As such, accredited mortgage brokers may be able to skip the property finance module, for example.”

PIPA’s membership is open to industry professionals associated with property investment, including brokers, lenders, property managers, valuers, developers and buyer’s agents.

“So brokers can also look to become a member of our association if they want to highlight their expertise in working with property investors,” he says.

“It is also another means to demonstrate they are an ethical, trustworthy practitioner.”