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BFCSA: Developers exploiting loophole on property advice

Posted by on in ROYAL COMMISSION URGENT
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Developers exploiting loophole on property advice

Australian Financial Review Apr 30, 2019 6.26pm

Duncan Hughes

 

Developers are exploiting a regulatory loophole to offer lucrative commissions to accountants, financial advisers and mortgage brokers for recommending real estate, according to industry specialists.

The regulatory gap excludes real estate as a financial product, or investment, which means advisers can lawfully accept more than 8 per cent commission to recommend property, or more than three times the usual rate.

Some advisers failing to rebate part, or all, of the commission payments are also disguising the windfall by disclosing payments as consultancy, or marketing fees, in statements provided to clients, according to industry specialists.

“Ethical financial advisers abhor the commission offerings that are being continuously sent to us,” said Paul Moran, principal financial planner with Moran Partners. “There are a lot of people masquerading as financial advisers who are fundamentally accountants or mortgage brokers. Wearing more than one hat increases the risk of switching around their roles to suit their outcome. Of course, not all do that.”

Daniel Brammall, president of the Independent Financial Advisers Association of Australia, added: “We have seen investors being recommended two, three, four, five properties by the same accountants or financial advisers.”

“Investors are discovering years later that developers’ generous valuations overstated the true value of the properties. They are learning the hard way that the exorbitant commissions were priced into the purchase price. Developers are not paying big commissions for nothing.”

Peter Alvarez, director of Navigate Wealth, a buyers’ agent and financial adviser, said the regulatory exception was property in self-managed super funds, which is well regulated.

“But this is only 3 per cent of the property market, not the 97 per cent purchased in personal names, often in search of tax benefits.”

Scott Girdlestone, director of wealth advisory at William Buck accountants and advisers, said: “If advisors are accepting large, or indeed any, commissions from property developers to get their clients to invest, then clients are entitled to ask the question, is this ‘advice’ really appropriate and in my best interests?"

"There is a huge conflict of interest here. When does the adviser stop advising and merely becomes an agent effectively working for the property developer? The answer is when they accept these commissions.”

Mortgage brokers warn that falling income adds pressure to accept higher commissions to offset the slowdown in commission payments for recommending mortgages.

Under existing rules, mortgage brokers do not have to disclose commissions. Accountants and financial advisers are expected to under their codes of practice.

The Hayne banking royal commission’s terms of reference did not cover the issue of commissions for advising on real estate, despite being highly critical of advisers receiving commissions for investment products.

“Imagine going to someone to ask about real estate and the only way they get paid for advice is to shift a product with commission,” said Mr Brammall. “Is that advice or sales pitch masquerading as advice”, he asked.

Independent inquiries going back to the Wallis Report in 1997 have warned that unrebated commissions or similar remunerations “alter the character” of the relationships between client and advisers.

Industry professionals are being offered two and three times regular commissions of 2.5 per cent, marketing fees and GST, typically high rise properties hit by the property downturn.

Commissions of more than 8 per cent, plus GST, are on offer for apartments in West Melbourne plus lucrative rental deals for buyers, such as 5 per cent rental guarantee for five years.

The offers are being sent directly to financial advisers, mortgage brokers and accountants.

The Accounting Professional and Ethical Standards Board (APESB), which is funded by three accounting organisations, has warned of the “threat to the fundamental ethical principles arises from conflicted remuneration such as commissions … which operates in a manner to influence a member’s behaviour that is contrary to the client’s best interests.”

But the peak organisations – CPA Australia, Chartered Accountants Australia and New Zealand and the Institute of Public Accountants – rejected moves to prohibit conflicted remuneration models.

Under the accountants’ code of practice, clients must be made aware of the relationship, identity of the other party, method of calculation of the referral fee, commission, or other any other benefits.

“The professional standards do not address specific rates or caps for any services as these are commercial considerations to be resolved in the market place by the parties concerned,” a spokesman for the APESB said.

A random selection by The Australian Financial Review of 10 financial adviser and accounting company guides reveals they accept referral fees of at least 2 per cent – plus GST – plus an additional fee of 1 per cent of the purchase prices.

The statements claim it is paid by the provider and “not an additional cost to the client”, without referring to any rebates.

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Guest Wednesday, 20 November 2019