The threat of unlicensed property marketers has some industry experts calling for a legislative update to better protect this area. But while the hysteria around property spruiking persists, the number of actual cases has been blown out of proportion, writes Krystine Lumanta.
As the SMSF pool continues to swell, so do the opportunities for inappropriate advice and investments, particularly when it comes to buying residential property for a fund.
The alarm over property spruikers targeting SMSFs, fuelled by a Reserve Bank of Australia (RBA) review, dominated the headlines in this area in the back half of 2013.
In April, the Australian Securities and Investments Commission (ASIC) declared it was ramping up its focus on aggressive advertising and marketing that targeted SMSF investors, including the increase in geared investment strategies where having a licence to advise and the rules around appropriate conduct had been disregarded.
“We’re working with the professional associations and other reputable players to make sure we don’t see problematic conduct become widespread,” ASIC deputy chair Peter Kell said at the time.
Out of almost half a million existing SMSFs, ASIC permanently banned one adviser last November, although for fraudulent behaviour involving SMSFs investing in listed equities and derivatives, not property.
Industry professionals continue to point out the lack of evidence as Australians stung in property investment schemes remain outside of SMSFs for the most part.
SMSF Professionals’ Association of Australia (SPAA) director of technical and professional standards Graeme Colley says reported cases of spruiking to SPAA, while low, had become more common in the past six to eight months. “What it’s come out of is a lot more talk about increases in real estate prices, which was getting a lot of publicity generally last year, and more people coming into the market to sell mortgages and so forth,” Colley says.
“I think that seems to have heated up the actual promotion of [property in SMFSs] in the last eight to 10 months.”
Heffron document services manager Duane Pinches says he has yet to come across cases of property spruiking. “We haven’t really seen it based on who we are; our clients are predominantly advised by licensed, professional financial planners,” Pinches says.
Anatomy of a spruiker
Ultimately, the issue boils down to property marketers giving advice, Smart Solutions Group senior SMSF strategy adviser Tim Shapter says. “In simple terms, they tell clients, ‘Did you know you can buy a property in super?’ and while they say they can’t give advice, they’ll tell them how it works, then the bad ones will tell them to go online and set up a super fund,” Shapter says.
“The good ones tell them to see a financial adviser.”
DomaCom chief executive Arthur Naoumidis says spruikers are property developers, real estate agents working with the property developer and some mortgage brokers, who operate to inflate the value of property in order to gain a large commission.
“They create these things, package them up, polish them up, create fat fees and then scour the market for funding – they’re salespeople who sell the property, make their money and then move onto the next one,” Naoumidis explains.
“Part of the reason is that a lot of property developers are really struggling to get funding from commercial banks so everyone’s looking at alternatives.”
Naoumidis also clears up the speculation around property spruikers bribing and targeting planners.
“They do sometimes but most cases the spruiker will pitch directly to the investor and convince them of a great buy on the Gold Coast, for example,” he says.
“In some cases, even though it was against their planner’s advice, clients have still gone out and done it anyway.”
Colley says spruikers and marketers tend to have some link with the newer areas for SMSFs.
“You’d assume that it’s the financing of those areas and that would link in with developers, builders and so forth,” he says.
“That’s a relatively high risk area in the building industry anyway and that seems to be where it’s come from. It’s certainly not the banks [as] their main complaint is that they’re cleaning up the mess they get handed from a whole range of people who really don’t know what they’re doing.”
Shapter also points out that after property marketers another problem is the behaviour of certain accountants and solicitors.
“I know of accountants and solicitors who, when given the files from the property marketers, don’t even talk to the client. They set up super funds, send out the paperwork and expect the client to do the rest,” he says.
Given the commissions and everything else spruikers are paying, the impact on the investor is palpable but the impact on the adviser is also a risk.
“Property spruikers are the enemy of the financial planner because when their client signs up for the property deal, where do the funds for that purchase come from?” Naoumidis says.
“Their portfolio is managed by the planner, so what happens to that planner’s revenue? It drops, 20, 30, 40, even 50 per cent and that has a knock-on effect on the planner’s business because the value of the business has to do with recurring revenues and EBITs (earnings before interest and taxes), but now that’s all been impacted.”
LRBAs: A drop in the ocean
SMSFs have been unfairly marked as the source of the next real estate bubble, with fingers pointing to limited recourse borrowing arrangements (LRBA) as the selling point for those with vested interests, in addition to the industry also getting in on the action.
But the correct statistics are not receiving any airplay, Pinches says. Against the background of a 17 per cent increase in total assets where the assets as of 30 June 2012 went from $425 billion to $496 billion, limited recourse borrowings only grew 8 per cent from $2.3 billion to around $2.6 billion.
“The big headline is that the number of SMSFs buying residential property will create a housing bubble, inflating prices and spiking everything, yet the trends and the numbers just don’t support it,” Pinches says.
“It would take an enormous turnaround in SMSF trustee asset allocations and behaviours to create something that’s got the potential for them to be the holder of that pin that’s ready to prick the bubble. Is it being blown out of proportion? I think the hard facts support that and what’s unfortunate is what’s getting more coverage is all of the speculation and emotive comments and the hype, as opposed to the hard data.”
Colley adds the most recent RBA figures on home lending and lending for investments were well below 1 per cent of the total loan book that related to SMSFs. “We certainly haven’t seen that large increase in gearing in SMSFs as the rumours suggest,” he says.
“Outside of superannuation will be the [area] most likely to cause a spike or a longer-term spike than just SMSFs.”
Naoumidis says good advisers are aware of how dangerous it is to peddle LRBAs.
“After speaking to financial advisers about the issue, most of them wouldn’t go near it with a barge pole because if anything blows up, they’ll go back to the statement of advice where the financial planner is going to have to demonstrate they explained all these risks and that the client accepted them all,” he says.
Change in legislation required
ASIC is continuing to undertake ongoing enforcement to address the risk of property spruiking in the SMSF space. But while the broader industry generally welcomes greater regulation for real estate investments in SMSFs, whether or not property should be defined as a financial product remains debatable.
Pinches says the licensing regime is far from perfect, but at least requires recommendations about SMSFs to be made in a responsible way with all the client’s circumstances considered, rather than allowing an unlicensed person to suggest SMSFs.
Colley adds there is a lot “going on behind the scenes” with the regulator.
“At SPAA we’ve gone to a lot of trouble to find out about the spruikers. Often it’s mere speculation, but anyone that gets reported to us is referred to ASIC and we do know that ASIC is doing a lot,” he says.
“The previous government some years ago brought out some changes to the rules relating to LRBAs where anybody giving advice in relation to LRBAs would be required to be licensed because that would be treated as financial product advice. We support that. We think that’s far more overt in what’s required to be done, rather than having the regulator say it’s currently covered and then testing cases before the courts.”
Shapter says as SMSFs are no longer a niche market, specialist accreditation is vital.
“When I started in SMSFs about 10, 15 years ago, you had to have specialist accreditation but for some reason that’s all gone by the wayside,” he says.
“I just don’t know how you can give a carve-out for SMSFs to anybody who’s not a financial planner for the fact that, at some point, you’ll need to also talk about investing, insurance and estate planning.”
Investor education necessary
Contrary to what the market reports, accountants and advisers are actively talking their clients out of property investments and LRBAs in SMSFs, according to Naoumidis.
“That, to me, is really demonstrating they’re doing the job that they’re being paid for,” he says.
“People are tarring the accounting and financial planning industry as being hooked up with all this spruiking, but actually, in most cases, they’re protecting their clients because even if it’s a good idea, it’s a single-point risk.
“I think [we need more] coverage of what’s really happening, the real risks and getting people to think about what they’re doing.”
Often, investors believe LRBAs for SMSFs are similar, if not the same as a personal mortgage for their own property and hence find themselves in trouble. “Many people have got the perception that if SMSFs can borrow, it’s as easy as mortgaging their property, so they’ll go to a real estate agent and the bank will fix it up,” Colley says.
“They don’t realise that banks are much more conservative in their lending policies on SMSFs. They want them to be absolutely watertight because it’s a double-whammy if the super fund falls over and the property goes bad.”