What is your duty of care?

One example in particular highlighted these two schools of thought. An article in a broker magazine was talking about how a secondary lender was determined to quickly increase the business they received from brokers. I initially thought they may have created a new product or outstanding offer that could be good for our clients. But reading further, the secret to this lender’s strategy was increasing their commissions to brokers.
Even though there was not a single tangible benefit to the client, the following editions of the magazine reported it was a great success. It was depressing realising that so many brokers would put commission before their clients’ interests.

Regulation and educational requirements have forced many part time and uncommitted brokers out of the industry since then, so hopefully that approach would no longer work. Or would it?

While this is not a utopic vision of creating a noble broking industry, it does raise the issue about where the duty of care lies when a broker is asked to write a loan.

Firstly, what industry do you think you work in? For me, brokers are in the property industry. For simplicity’s sake, this is the home buying industry, the investment property industry and the commercial property industry. But a lot of brokers think they are in the loan industry. Granted, this is an important component of the property industry, but it is not the main deal.

Secondly, how would you classify your mindset when it comes to property investing? Brokers tend to operate in three different mindsets: the novice, the protector or the expert. Let’s meet them – see if any of them are close to your perception of how you operate as a broker.

1. The Novice: I know nothing! Whatever kind of loan you want for whatever kind of property you want is fine by me. I will do what I can to get you the loan, otherwise leave me out of it.
2. The Protector: I care about your success and would rather turn down a loan than have you buy a bad property on my watch. I only have some fundamental knowledge on property investing but I have access to a team of experts that I trust that I can refer you to (and not just because they are paying me to do so).
3. The Expert: I will not only organise your loan I will make sure you invest wisely, because I know plenty about property investing.

Which one of these is the most dangerous for an average investor to work with?  The Expert.

And the best? The Protector.

Why? From the client’s perspective, The Novice is not a lot of help, but at least you are under no illusions that you are on your own and that may lead you to finding someone who can help you invest wisely.

The Expert is the most dangerous because they are promoting themselves as a property expert and odds are that they aren’t.

The Protector admits they are not an expert on property investing and only have a basic knowledge, but they have sourced a trusted team they can refer you to and they do have your best interests at heart.

If you don’t believe me that there are Experts out there, you only have to look at the marketing collateral produced by one of the major brokers (hopefully they won’t be too sheepish to admit who they are).

This company promotes their brokers as investment property specialists, when the only thing that backs them up is a booklet on property investing (that someone else has written for them). In fact, if you go through the list of what makes this company’s brokers so special, they point to their services offered by each broker even though the same thing is offered by almost every other broker.

They will:
• Work out how much equity you have
• Work out how much you can borrow
• Determine the main costs of buying an investment property
• Find out where you could afford to buy
• Find out which properties are available for sale in your selected area.
Big deal. The first three points are bread and butter for brokers, and the last two could be completed by any chump with an internet connection.

But what about the booklet? That was full of important information about property investing, right? Kind of. Following the advice from the booklet, the investor would quickly jump on the internet and be bombarded with the ‘golden rules’ again. You know the ones: buy within 7km of the CBD in a period home, with a tree lined street.

For the investor, this sounds perfect. They have lots of equity and only a small home loan. Because the broker doesn’t know any better, they assist with the process and arrange the loan.
And the majority of them will lose money and sell at a loss.

Why? Because the most important thing you need to understand about an investment property before you buy is nowhere to be found in the process mentioned in the 12-step or 15-step investment booklet.
What is the cash flow?

Not understanding the cash flow on an investment property before you buy is the biggest mistake made by property investors.

And the cash flow on this kind of property is likely to be negative about $10,000 a year, and that is with historically low interest rates. A figure that is unsustainable for the average investor who often sells at a loss and worse is scared away from investing in property in the future.

I think as a professional broker you should learn the fundamentals of investing in property so at the very least you can make sure your clients don’t stuff it up.

Are you a protector, an expert, or a novice? And when it comes to your clients, do you really care?

Michael Sloan, founder and managing director of The Successful Investor

Michael Sloan is the Founder and Managing Director of an Australia wide company The Successful Investor. Michael is a Qualified Financial Planner, Mortgage Broker, Investment Property Advisor, and Managing Director of The Successful Investor. Michael holds a Full Real Estate Licence and has many accreditations and awards to his name including Mortgage Lender of the Year.

The National Bank of Australia appointed Michael as an external Property Investment Advisor to their customers and you can find his various articles on their website. His appointment to the NAB is quite unprecedented and is a reflection of Michael’s strong ethical standards and wealth of property experience.

Michael’s core values at The Successful Investor are trust and integrity as they help everyday Australians create wealth through well planned property investment strategies.

Michael presents at property forums and workshops Australia-wide teaching people about property investing from the basics to more advanced strategies. These events are purely educational based without the pressure to sign up or buy on the day; just quality information. He has a direct tell-it-like-it-is style and shares his knowledge candidly. He believes property investing is more achievable than most people think. His goal is to make sure investors don’t stuff it up!