I have a couple of general question about companies or individuals who give advice of an investment nature and the consequences for bad advice.
1) Can mortgage brokers give advice or refer a client about buying a certain property. 2) If I follow the advice of a financial planner or someone who is qualified and it turns out to be a bad investment is there any recourse. 3) If someone giving advice says it is only of a general nature is that enough to indemnify them even though you are paying for their advice? 4) Do real estate agents qualify as professionals and that their claims can be held to account?
These are just general questions I have about the industry. I know different states might have different legislation but I thought I would post here as I can't seem to find much information about advice giving and the laws governing it in the real estate industry.
I have a couple of general question about companies or individuals who give advice of an investment nature and the consequences for bad advice.
I'm answering this not so much because I know the answers as that I am very interested to hear what the real situation is from those who actually know!
So I'm bumping this thread.
Below are what I understand of what the answers are:
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1) Can mortgage brokers give advice or refer a client about buying a certain property.
I think anyone can give advice about property and refer people. There may be restrictions about whether they can receive a commission or "finders fee" from the actual selling agent. I have heard stuff all over the shop on this one and suspect it varies by state.
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2) If I follow the advice of a financial planner or someone who is qualified and it turns out to be a bad investment is there any recourse.
If they are a licenced financial advisor, you probably have recourse if you can prove they are negligent. (i.e. there is something they should have known if they had shown ordinary diligence for a professional, which they did not know or forgot, and as a result of this they gave very bad advice.) If it just turns out badly I suspect you would have no recourse.
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3) If someone giving advice says it is only of a general nature is that enough to indemnify them even though you are paying for their advice?
General advice could be negligent. But very hard to prove I would have thought. The problem is that general advice is opinion rather than fact and smart people differ enormously in their opinions.
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4) Do real estate agents qualify as professionals and that their claims can be held to account?
I think they have to tell you the truth, and there are certain things that they have to tell you that they are required by law to know for sure. But in the end a real estate agent is a salesperson and not an advisor. When you get right down to it they are not representing the interests of the buyer or the seller - it is in their interests to sell at any price they can get both sides to accept. Notwithstanding that I have found certain real estate agents to be well worth listening to, as long as you discount the information for their point of view. I don't think they qualify as professionals under the generally accepted meaning of the word, but some are very professional in their dealings. Some of course are not, but I suspect that sort exit the industry fairly quickly (but not before causing quite a lot of grief. And turnover is high so there is an endless supply of idiots and crooks out there.)
1) Can mortgage brokers give advice or refer a client about buying a certain property.
I can answer that question. I assume that you are referring to a case when perhaps a mortgage broker refers a client to a real estate agent, or perhaps sends them off to see a specific property. It's pretty much the same for any professional whether that is a broker, a RE agent, an accountant, stockbroker, financial planner etc.
If anyone derives money from a subsequent transaction that occurs as a result of that referral it must be declared, and that must be in writing although the parties may advise verbally and formalise that later. The client/buyer must be made aware of the beneficial interest.
There are also commissions known as "soft commissions" that should be declared as well. If the referrer is rewarded with a free trip to Bali for two then that trip or the commercial value of it should be disclosed.
It doesn't apply to "promotional offerings" such as a free coffee, baseball cap, a free pen etc as that happens in all industries, but any cash payment or benefit of value must be declared.
As far as I am aware the code is national, and does not vary between states although the regulations may be state based, but a uniform code of conduct such as the UCCC which is a law passed by every state that is identical in each state.
There is a heap of information at ASIC - way too much for me to know, but you can start here if you wanted to know more.
Any expressed market opinion is my own and is not to be taken as financial advice
I have a couple of general question about companies or individuals who give advice of an investment nature and the consequences for bad advice.
1) Can mortgage brokers give advice or refer a client about buying a certain property. 2) If I follow the advice of a financial planner or someone who is qualified and it turns out to be a bad investment is there any recourse. 3) If someone giving advice says it is only of a general nature is that enough to indemnify them even though you are paying for their advice? 4) Do real estate agents qualify as professionals and that their claims can be held to account?
These are just general questions I have about the industry. I know different states might have different legislation but I thought I would post here as I can't seem to find much information about advice giving and the laws governing it in the real estate industry.
Not my expertise, but my opinions are:
1, It depends on how you define "advice". Under ASIC and Corporations Act (2001), it is a specific and defined term.
Section 766B of the Act provides that a person provides financial product advice if they
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provide a recommendation or a statement of opinion or a report of either of those things that: (a) is intended to influence a person in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or (b) could reasonably be regarded as being intended to have such an influence.
For those individuals (including Mortgage broker, Accountants, Lawyers, Real Estate Agents, Tax agents, etc) who provide “financial product advice” they must be PS 146 / RG 146 compliant. It is illegal to provide such advice without being authorised to do so.
So unless the mortgage broker is licensed and trained to provide "financial advice", then they are not supposed to.
As Peter mentioned, there is no legal issue with referring a client on to other professionals in relation to property acquisition/investment. If the mortgage broker receives financial/non-financial incentives from this referral, provided the mortgage broker discloses the arrangement to the client, no law has been breached, imo. However, arguably there is a conflict of interest from an ethical perspective.
Things to consider: a, Whether it constitute financial advice, is judged on a case by case basis. e.g. if a mortgage broker use the client's income and existing liability to work out a payment schedule, and "advice" the client's that s/he can afford (have the serviceability) the mortgage repayment for a certain property. Then it is perfectly within a mortgage broker's capacity to recommend. b, It is an arduous complain and investigation process for the complainant c, The punishment and consequence is ineffective.
2, Depends. If a financial planner has gone through the due diligence, and can demonstrate that s/he has taken reasonable steps to understand the client's needs, objectives, circumstances, time horizon, risk profile, etc and can justify the product selection process and analysis, then not a lot you can do. There is no certainty in investments, that should have been explained to the client in the first session to align expectations.
However, it shouldn't stop the disgruntled client from lodging a complain and seek damages (civil and criminal) to the relevant governing bodies. (e.g. ASIC, Justice system, etc). If the client can demonstrate that the financial planner exhibited recklessness, incompetence, intention to deceit, etc, then s/he may have a case.
3, Whether or not you are paying for the service is irrelevant. A qualified financial planner has a responsibility to the general public. You can seek compensation for damages resulted from a free advice in a public context, if you can demonstrate that the financial planner had reasonable expectation that the recommendation is likely to lead to action.
However, to answer your question, well... depends. Is the general advice really general advice? It can only be "general advice" if no recommendation is made to the client as to the suitability of that product. Simply labeling specific advice a general advice doesn't necessarily make it so. If the client can establish that the financial planner is aware that the "general advice" is likely to lead to action, which resulted in damages, then it is not enough to indemnify them.
E.g. Specific advice: You should allocate X% of your investment fund in XXX share at $XX.XX now for the following reasons..... General advice: YYY share price has doubled in the past 12 months. Disclaimer: general nature only.
If the client bought YYY shares as a result of the general advice, then yes, it is enough to indemnify the financial planner. However, I'm not sure why a paying client would be interested in general advice only.
4, Depends on how you classify professionals. Personally, I would not consider real estate agents professional as they do not have a professional code of ethics. However, they are accountable for the state laws.
This is a wealth of info guys, I pretty much understand the situation a bit better now.
+10 to all responses
Most professionals are very aware of the danger of litigation, so effectively most are trying very hard to avoid giving any real unsolicited financial advice.
That's a double edged sword. Laws that have been enacted to ensure that poor advice is not given has effectively meant that often NO advice is given. Most professionals want to give you information and then let you make the decision. That works well for financially literate people, but it just doesn't work for someone who is all at sea with finance. They want someone else to make their decisions for them, and that is fraught with danger.
Professional have to go through several steps to analyse your circumstance and support why certain products were chosen for you, and all of that is recorded in case you take legal action at a later date. They have to be able to show why certain decisions were taken long after they have probably forgotten the detail. For me that is all stored in a cloud off site on another providers system. That was a requirement of the NCCP regulations that came into practice 01/01/2011 although some small lenders still use hand written documentation.
I don't know about other professions, but in mortgage broking it only has to be a suitable product that is chosen, it doesn't have to be the lowest interest rate product on the market on that date, but it does naturally have to be competitive.
There are good reasons for that. You may express a preference for certain lenders, or you may want a type of loan that is only handled by a small number of lenders - eg a reverse mortgage, or the times are volatile and certain lenders may be seen to be more reliable than others, there are numerous variations.
Or you may have an impaired credit history, or you might want to buy a house on 85 acres, or you may be self employed, on contract, on commissions, employed on a casual basis, change jobs often, or the house that you want to buy is zoned commercial, or your income may be derived overseas, or you might want to buy a home unit that is only 35 Sqm, or you might want to buy a serviced apartment, or you might want to buy a block of 4 strata titled units, and so on.
Everyone thinks that banks are all the same - they are not, and everyone thinks that they are are an average borrower, but in fact there are more variations than most people appreciate, so it's often not straighforward.
I'm not trying to confuse you, but the best choice is often the most competitive loan available for your purpose and situation, and those conditions may exclude more lenders than it includes.
Any expressed market opinion is my own and is not to be taken as financial advice
So you’d like to invest in property? That’s how everyone makes money, isn’t it? Put your nest egg into bricks and mortar – then watch it grow in value. But who do you turn to for the right advice? A Real Estate Agent? Heavens, no – everyone knows they’re working for the seller and full of self-interest. What about a Property Consultant? An Investment Advisor? A Financial Planner! Or better still – an Accountant. Accountants are good with money – they must know what they’re doing. Right?
Thousands of perhaps naive investors have had these thoughts, and paid a very high price. An unnaturally inflated price in fact, to cover extraordinary kickbacks to their financial advisor of choice.
The Real Estate Institute’s 2012 Buyer’s Agent of the Year, Brisbane-based Simon Pressley, is blowing the whistle on what’s becoming an alarming trend in property consulting circles. Pressley says he receives one or two calls a week from developers, big and small, offering him up to $35,000 per property to sell their brand-new stock to his investment clients.
Was that a typo? Was that really $35,000 per transaction? Good money if you can get it! Ripping off investors pays really well!
Pressley is appalled by not only the tactic, but the number of property consultants, accountants, advisors and financial planners happily going along with the charade. These are quieter-than-usual times in property, and perhaps belts have tightened in various advisory firms as well. Big money is being splashed around if developers can make a sale or fifty – and at $35,000 per purchasing client, it would have to be tempting for the consultants, advisors, accountants and planners.
But wait – there’s a stench. Who’s paying this extra $35,000? The naive investors – Mums and Dads, High-Earning Singles – whatever you want to call them. They’re the ones paying what has to be an inflated price for a property. It’s inflated by at least $35,000 and very likely more.
“The consequences of poor property advice can be significant; someone needs to do something. But there’s a lack of legislation governing firms that profit from convincing investors to purchase specific properties,” says Pressley.
Many investor clients rarely question the price of the properties they’re presented with, from their ‘financial advisor’. Very few will even compare their accountant’s suggestions with competing stock on the net – it really does all come down to their trust in their advisor, and their perhaps mistaken belief that their advisor will not let them down.
“There are thousands of people who have invested in a lemon, on the recommendation of a mortgage broker, financial planner, even an accountant. None of these professions is qualified to give direct property investment advice, yet loopholes enable them to participate and reap enormous benefits,” says Pressley.
Some people are good with property. They just know what makes a great buy; they instinctively know the difference between a good property and a great one, and they know how to secure that great buy for the lowest price without letting their heart take hold of their wallet.
The rest of us need a little – or a lot – of guidance. Others, with less of a clue, unfortunately depend strongly on professional advice from a trusted source.
And that’s where state and federal governments are letting naive investors down.
It’s not immediately clear whether this alarming ‘kickback’ trend is actually illegal. There are strict laws governing the fees charged by real estate agents and buyer’s agents, but the waters are muddied when it comes to an accountant hooking you up with a developer. Certainly you can bet the various participants in this charade have got all their paperwork in order to defend their actions. However, Simon Pressley says most investors who buy this way would be unaware of the massive kickbacks at stake – and that lack of transparency should be illegal.
“If they want to sell someone else’s product, then the law should require them to become a licensed real estate agent. Even then, they can’t give financial advice and the buyer needs to know that the ‘advisor’ is representing the seller or developer.”
It’s also possible that some of these ‘kickback’ participants might actually be breaking the law, and certainly bending it. Since the Storm Financial mess, financial advisors are now legally bound to offer advice that is in the best interests of their clients. Telling a client to buy an overpriced property that doesn’t compete with existing stock must be in breach of that, surely. It would be hard for a firm to defend its record if the only properties its clients purchased were – shock – all produced by the same kickback-paying developers.
“Most of the properties are probably already valued significantly less than the purchase price. Throw in large volumes of forced sales in those outer-suburb ‘mortgage belts’ and the losses become even bigger. Legislation is needed to prevent any ‘advisor’ from deriving any form of income out of a property transaction,” says Pressley.
It’s now up to state and federal governments to take a closer look at these huge ‘kickbacks’ in the property investment industry.
In the end though, it comes down to the age-old rule: Buyer Beware. Do your own research; question everything anyone tells you to do; make sure it stacks up for you.
And, there’s also a new rule to live by: ask your trusted advisor of choice – ‘How much are YOU getting out of this?’
I guess it does tell us that there are no hard rules, just "guide lines" in the industry. It would probably take a law suit or a large scale event before the government gets involved.
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