On Friday, I met up with a friend and asked him what he was doing on the weekend. My friend told me that he had some money he wanted to invest and was doing an online seminar to learn more about the options. I was immediately interested in finding out more.
The seminar was provided by someone claiming to be a lawyer but I couldn’t find their name in the NSW Law Society ‘find a lawyer’ search. The headline cost was $4,500 for a 2 day (online) seminar on real estate investing. The course was designed to funnel participants into paying $30,000 for ‘Elite coaching’ or investing in small-time property developments using the $2m fund raising exemption.
This is an old and tired business model that has been heavily criticised (notable mentions include: Robert Kiyosaki, Trump University etc). Yet people are still happy to sign up despite the poor reviews. A quick google search was enough for me to find out that this ‘real estate guru’ had their share of dissatisfied customers.
Apparently the recommended ‘strategies’ involve conduct that is high risk, immoral, dishonest & potentially illegal. My favourite explanation is: “We charge high fees not to enrich us but to motivate you to take personal responsibility for doing the work.”
There is a mystique about real estate that seems to be attractive to inexperienced investors. Definitely there are people who got rich over a period of 10 years or more, but sadly there is no secret easy money to be made there. Ever hear of the old get rich joke? The best way to get rich is to write a book about how to get rich!
Apparently there is a huge amount of untapped demand for financial advice. Many people have an intention to seek advice within the next two years. It’s not easy to find an adviser they can feel comfortable with and who is willing to engage with them on acceptable terms. They also have a preference for advice on specific questions while most advisers prefer to provide a holistic service.
Gaps in Regulation
Our regulation defines Financial Advice as advice about financial products which include shares, managed funds & superannuation. It doesn’t include direct real estate or small businesses. This distinction is not easy for consumers to understand or even be aware of. They think they are getting professional advice when they are being preyed upon by unaccountable charlatans.
Tighter regulation of Advice
Financial advisers were subject to a significant level of criticism from the Royal Commission into misconduct in the banking superannuation and financial services industry. As a result there have been many changes to the regulation of Financial Advisers.
The main changes are:
- A much higher education and ongoing training standard.
- All investment commissions to be eliminated by the end of this year.
- Ongoing service agreements will need to be renewed annually.
- Financial Advisers are subject to a higher standard of conduct.
The mandatory Financial Adviser Code of Ethics includes:
- Maintaining a high level of relevant knowledge and skills.
- Acting in the best interests of clients.
- Ensuring that clients understand the risks of recommended financial products.
- Ensuring that fees & charges are fair, reasonable and represent value for money for the client.
Financial Advisers must operate under an Australian Financial Services Licence. The licensees are legally liable for the conduct of anybody purporting to give financial advice under their licence. Licensees are required to maintain membership of the Australian Financial Complaints Authority (AFCA) and hold Professional Indemnity (PI) Insurance. They also must lodge audited financial reports confirming solvency by 31 October each year.
All these requirements positions the licensee as the first line of enforcement when it comes to making sure their advisers uphold the Code of Ethics as they not only have regulators like ASIC but also their PI insurers are breathing down their necks. If PI decides they don’t want to renew our policy, we lose our licence with no recourse.
This means that anyone who has a complaint about a Financial Adviser has an easy way to have that complaint heard independently and a reasonable prospect of receiving financial compensation for losses. It can cost more than $10,000 for a licensee to defend a case in AFCA so there is a tendency for small claims to be quickly settled.
Clients can take comfort in knowing that most properly licensed Financial Advisers are serious about the business and will try their best to give good advice. It’s possible to get comprehensive advice for around $3,000-$5,000. If you’re not happy with the advice, you can easily get your money back.
Unintended Consequences
The problem is that as a result of these well-meaning regulatory changes the number of registered financial advisers is sharply declining. It has become a lot harder to access advice with the advice process becoming more complicated and the costs are increasing.
Licensing now costs an average of $38,500 per adviser per year. Advisers must spend a significant amount of time undertaking training and staying on top of administration. The number of hours available to service clients is reduced so the hourly rate must go up.
Comprehensive fact finding & research is required before advice can be given. Clients can become frustrated by compliance procedures even when those procedures are specifically designed to protect them.
Despite those difficulties, surely it must be better to consult a professional adviser than spending the same money and 16 hours of your weekend listening to real estate sales pitches or day-trading Afterpay shares?
What do we need to do to encourage people to seek out good advice from properly qualified lawyers, accountants & financial advisers?