The continuing rise of property - residential

Over the past few years, the Financial Planning Association has called on ASIC to regulate real estate agents who provide property investment advice. Shifting the spotlight back, Zilla Efrat examines just how much financial planners are doing in the residential prop-erty arena.

Over the past few years, the Financial Planning Association has called on ASIC to regulate real estate agents who provide property investment advice. Shifting the spotlight back, Zilla Efrat examines just how much financial planners are doing in the residential prop-erty arena.

Buying a residential property is likely to be the largest single in-vestment most people ever make. Yet, giving advice on residential property is not something most financial planners do in any sort of detail.

One reason is that most clients already own their homes by the time they first visit an adviser. Another is that residential property in-vestments often break the rules of financial planning.

"The philosophy of financial planners is directed towards diversifi-cation across asset classes and then within asset classes to reduce risk," says AMP Financial Planning technical resources manager Bonnie Guilford.

Because most clients can't afford to buy more than one property, their advisers will not consider property as an investment option for them, she says.

In general, home purchases are seen as being guided more by lifestyle factors than by investment logic. Advice is also made difficult by the myriad of factors that come into to play with conditions fluctu-ating from suburb to suburb, and even from street to street.

Moreover, most financial planning groups are just plain bearish on residential property right now.

"Basically as a group, we see it as a low growth area and we don't recommend it directly, " says Associated Planners' Jean Gillies.

This is in spite of the special affinity many clients have with real estate. "They feel comfortable with it and they like its tangible as-pects. They can touch it," says Peter O'Toole, director and head of financial planning at Deutsche Bank.

Among the many drawbacks to investing in residential property cited by financial planners are: the lack of liquidity, especially if in-vestors need to bale out quickly; its indivisibility; and the possi-bility of unreliable income.

"Would you prefer income from a major fund manager or from Mrs Smith?" asks O'Toole.

"We are in a low inflation and low population growth environment and likely to stay in it. These two factors affect the price of property investments," he adds.

Most planners note that the negative gearing advantages enjoyed by residential property can now be applied to other investments, such as shares.

They add that the costs of residential property are often much higher than people first estimate because of stamp duties, legal fees, re-pair and maintenance expenses and the time involved.

Some note a swing by customers away from property investments. "Cli-ents see that the returns are not what they used to be in the 1980s. Many invested in Commonwealth Bank or Telstra and are now more likely to put their money in shares," says RetireInvest research and techni-cal manager Assyat David.

Most financial planners, it seems, also stay clear of providing mort-gages. Some, however, will refer their clients to outside experts if they need help while others may compare loan options and match these to client's needs.

While more the exception than the rule, there are still some who do advise on property, treating it just as they would any asset class. An example is WHK Financial Services.

However, managing director Geoffrey Wall says about 70 per cent of this advice is focused on non-residential property. And, clients usu-ally need a portfolio of $1.5 million to warrant the diversification.

WHK does not take commissions or introduction fees from real estate agents, thus avoiding conflict of interests. Instead, it charges on an hourly basis for its services which include finding potential in-vestments, due diligence investigations, organising inspections and bidding on behalf of clients at auctions.

According to Wall, this process can be time consuming and can cost a client between $6,000-$10,000, "which if buying a million dollar property is not a great amount".

Peter O'Toole

Director and head of financial planning

Deutsche Bank

"Residential property usually dominates the portfolio in terms of as-set allocation and there is a tendency to look at it as one thing and the rest of one's investments as something else," says O'Toole.

He believes that to give good advice, financial planners would have to be party to a property development, which would give rise to a conflict of interest. Or, they would have to be real estate agents which would again be a conflict of interest because agents act for the seller rather than the buyer.

"These are conflicts of interest best avoided," O'Toole says. In-stead, financial planners should concentrate on the overall structure and management of a customer's portfolio. Some, however, could le-gitimately offer a home loan comparative service if they have the re-sources.

Assyat David

Research and technical manager

RetireInvest

"We've had lots of proposals showing us how we could make money out of residential property and home loans. And, we could also charge a fee for advice," says David.

"But we don't find that a lot of clients want advice on residential property. Most are already overweight in property because they own their homes."

She says RetireInvest has steered clear of the home loans business because margins have been falling dramatically. It also believes that there are many services out there through which clients can find out about home loans cheaply.

"It does not make sense to come to a financial planner and pay for this service."

Bonnie Guilford

Manager of technical resources

AMP Financial Planning

"Financial planners have the knowledge of where residential property sits in a portfolio, but they will not drill down to the details," says Guilford.

"If clients do want residential property in their portfolio, they may be referred to outside experts.

"We have AMP Banking and other groups also have similar arms if the customer needs home loan advice. We see this as a way to enhance our relationship with our client."

Financial planners should also be more pro-active in considering in-come protection or life insurance to protect clients with investment properties, adds Guilford.

Geoffrey Wall

Managing director

WHK Financial Services

"We have picked up clients because we do provide advice on property and this is a profitable business for us," says Wall.

"A real estate agent who advises on residential property would have split loyalties because it is the vendor who is paying. Customers need someone neutral or who has their interests at heart. That's the main reasons why we got involved in this."

Wall believes there is a growing trend towards giving advice on prop-erty, especially industrial property which has shown good returns. He is, however, bearish on residential property at present.

"I think that it is important that advisers know what they are doing and have the proper experience and knowledge. But very few do," he says.

David Williams

Group managing director

Bridges Personal Investment Services

"Financial planners ought to be able to talk about the principles of property investment. But at the end of the day, it's a lifestyle de-cision and will be influenced by factors like proximity to schools and stage of life," says Williams.

"I would not expect them to give anything other than general informa-tion."

The advice given by financial planners on residential property could include asset allocation, ways to leverage finances, prudent mortgage levels and social security implications if the client owns more than one property.

"If a referral comes through a credit union, as a large proportion of ours do, I would expect the credit union to work through this as it should fall within their ex-pertise," he says.