The Idealist August 12, 2004: Beware the wounded investor

Just imagine for a few minutes that you’re not involved with a financial services business. Further imagine that it’s 2003 and you’ve just walked into the local branch of a major financial institution, looking to borrow to buy a residential investment property.

You set about mortgaging your existing home to buy the proposed investment property and note that it doesn’t matter to the loans manager that you still have a large outstanding mortgage on your family home which is non-deductible. All the lender is concerned with is lending margins and the combined incomes of you and your spouse.

On the way out, you pass the office of this financial services business’s financial planner and wonder what they might have to say about your proposed purchase of the investment property.

Would they think it’s a good move? Would there be a better longer term investment? Would they agree with your investment strategy? What risks might they see in what you’re about to do?

While you wander down the street from your appointment, you wonder why the loans officer didn’t suggest that you speak with the financial planner. After all, investing in property is financially planning. But then, as a trusting soul, as most Australian property investors are, you conclude that borrowing all the extra money and using your home for security must be okay, because the loans officer made no mention of any risks.

Fast forward to the year 2006 and Australia has endured a moderate but constant period of rising interest rates. Your 2003 6.8 per cent per annum investment property loan is now sitting at 8.5 per cent and the home mortgage is at the same rate. Monthly repayments for your two 30 year loans are now $300 a month higher than in 2003 — and the real estate agent who manages your investment property has just rung to tell you that your tenant is six weeks in arrears with their rent as a result of being made redundant due to the downturn in the economy.

Three months later and the economic slowdown has hit your employer and you no longer have a job. While you wait in the Centrelink queue to register for unemployment benefits, your spouse rings you on what will soon become a luxury you can’t afford — the mobile phone — to tell you that her second job is no longer. That night around the kitchen table together, your worst fears are confirmed — the available numbers just don’t meet all your costs.

On the same night on the news, you hear that lenders are reporting a rising tide of loan defaults and you know you and your increasingly agitated spouse are in that statistic.

To escape the gravity of your financial woes, you’ve stopped watching the serious nightly current affairs programs and instead now turn to the tabloid versions where the ‘little Aussie battler’ always gets a hearing. Tonight’s program centres on a recent court case which saw a large Australian company forced to pay compensation because the company failed to exercise a duty of care to a customer in not pointing out risks involved in using the company’s products.

You swear at the large company and shake your fist in support of your fellow Australian who has just won the David and Goliath battle. Then the words start to circulate through your mind — “duty of care, duty of care…” In the next ad break you actually listen to what that lawyer is saying about helping people make compensation claims when they think they’ve been wronged. You decide that with the first consultation costing you nothing, you might as well give them a ring on the toll free number and see what they have to say about a lender that didn’t make an offer for you to speak to their financial planner who, you presume, would have warned you about the risks of borrowing to invest. Who, as a professional, you presume, would have talked to you about tackling the now out-of-control home mortgage first.

The point of all this is to highlight how simple it may be for someone from the latest round of investment excess — the residential investment property fiasco — to lodge a claim against a financial services business. It highlights the conflict that sits within some such businesses where one staff member has a clearly defined duty of care while another, we can only presume, must have a lesser duty of care.

Think such an outcome is not on? Think again. There are substantial legal precedents in similar situations. Witness the successful claims made by farmers against lenders who, in the early eighties, failed to exercise a duty of care in recommending that they (farmers) borrow in Swiss francs at 4 per cent per annum prior to the floating of the Australian dollar. While the interest rate was most attractive, discussion of the inverse relationship between a falling dollar and a foreign denominated loan was not part of the recommendation.

To current times and a generation of young Australians who, previously, have not had the baptism of fire that comes with paying one’s way through a rising interest rate environment, could almost be forgiven for their naivety in engorging themselves with debt.

As for the lenders who aided and abetted such excesses — companies with the dual role of lender and financial planner — one can only hope the individuals concerned sleep well when the next bad and doubtful debt crisis hits this nation.

And for the sales people who masquerade as professionals giving property investment advice, it’s high time that the Commonwealth banged the collective heads of the states together to bring about uniform property legislation across the nation. Legislation which will protect consumers and the economy from property excesses. Legislation which will ensure that people giving property investment advice have undergone the exact same training and education as a financial planner who wants to, for example, recommend that a client pay an extra $100 per month off the mortgage.

It’s nothing short of outrageous that such iniquity exists in the provision of financial advice — iniquity which is always to the detriment of consumers.

Ray Griffin is a Tamworth-based financial planner and former chairman of the Financial Planning Standards Board International CFP Council.