Borrowing to hold property within self-managed superannuation funds (SMSF) has Australia’s licensed financial planners worried that fast-talking, slick and glossy sales tactics will lead to the next crisis in the financial sector, and leave an increasing number of people with shell-like funds unable to deliver a pension when it’s needed.
While the problem has been somewhat contained so far, property spruikers are now deploying mass email campaigns in an intense effort to offer financial planners thousands of dollars in up front spotters fees or a percentage of sales if their clients sign up to buy, planners told Business Insider.
One was recently offered a $10,000 payment for clients who signed up for a property deal using their super.
The prize the property schemes want is a share in the $558 billion held in SMSFs. This represents about 30% of Australia’s $1.8 trillion in superannuation assets.
And the spruikers are using targeted lists which reach trained and registered financial planners, the main advisers to the 528,000 Australians who have set-up their own funds.
“It seems like there’s been sophisticated targeting of financial advisers based on massive distribution lists,” says Dante De Gori, policy and government relations general manager at the Financial Planning Association.
“By some means, they are getting the names. We’ve been very conscious of not letting anyone hack into our membership list because we have 10,000 members and the last thing we need is spam going out.”
Planners have been sending the association copies of advertisements and emails which are then passed on to the corporate regulator ASIC (Australian Securities and Investments Commission).
ASIC itself says it’s disappointed that people aren’t being adequately told about the risks by the promoters of unlisted property schemes.
This week ASIC said: “The results (of the review) are disappointing especially when, at a time in the rise of self-managed superannuation funds, many Australians are looking to invest in real estate. Property schemes have become popular investment vehicles for such people, but they do carry risks as well as opportunities.”
The Reserve Bank in September last year identified a trend toward risk-taking on property in self-managed super funds. The September meeting minutes said: “Property gearing in self-managed superannuation funds was one area identified where households could be starting to take some risk with their finances; members noted that this development would be closely monitored by Bank staff in the period ahead.”
Some property schemes urge attendance at seminars where brokers talk up deals and point out that self-managed super funds can borrow, usually with a personal guarantee, money to buy property for the fund.
Jenny Brown, head of strategy at JBS financial in Melbourne, says she’s been offered up to $10,000 or 4% of the purchase price as a spotters fees if one of her clients buys property for their superannuation fund.
“I’m active on social media and maybe that makes me a bit of a target,” she says.
“But the approaches I’m getting are constant, sometimes two or three a week.
“What worries me: is this going to be another another Storm crisis (the planning group which collapsed) or financial planning crisis (Commonwealth Bank) which will give all planners a bad name?”
The danger is that people will go ahead with buying for their super fund without seeking independent advice. Brown says property isn’t for everyone and care needs to be taken not to be over-geared.
She believes it will be a huge issue long-term, but won’t surface for another three to five years.
“It’s a nightmare waiting to happen,” she says.
“We’ve had a client come in, aged 55 and about to go into the pension phase, who was sold a property in a new development and it’s 80-something-per cent of his fund’s assets.
“At that age when you are potentially looking at turning your fund into a pension paying fund, there are no tax benefits all (in having a negatively geared property)
“There really needs to be appropriate advice for people rather than just flog a product.
“If you are going to go an buy a property, do the due diligence.”
She would recommend that no more than 60% of the value of a property be a loan.
“You’ve got to be in property for years to make decent money, at least ten years out (from retirement),” she says.
“And if you’ve only got $250,000 to $300,000 in a super fund then, in my view, that’s not enough. You shouldn’t be gearing into property.
“But there are spruikers out there who say you only need a couple of hundred thousand. I don’t believe that’s appropriate advice.”
On Sydney’s north shore, family-run financial planners, Quantum Financial, get people walking in off the street saying they’d just bought a property for their fund and the real estate sales people had given them a few hundred dollars to get the deal approved by a planner.
Planner Claire MacKay says she also gets people who’ve been sent by the bank, when they’ve sought finance for a property deal, to get an independent planner to sign off on the deal.
She can’t help either of them.
“There’s a risk to our business and we don’t know anything about the client,” she says.
“They’ve been given a couple of hundreds dollars to get a financial planner to sign off on the transaction. We don’t do that.
“Adding on leverage (borrowings) adds risk and invariably the financiers want a personal guarantee so that means that assets outside of super are also at risk. The potential for loss is very high.
“There are legitimate providers (of property) but also with such a large amount of money it does attract those looking for the quick buck as well.”
The Financial Planning Association says the situation is the wrong way round.
“Normally you work out whether it would be appropriate or in the interests of the individual to have a self-managed super fund in the first place let alone what investments are needed,” says Dante De Gori.
People are being sold the property dream which they more readily accept now following the GFC and the subsequent fall in share prices.
Property feels safer to some people, he says. But that only works for as long as property keeps going up or holds its value as it has done for the last two years or so.
“I just think that’s very scary,” says De Gori.
“Without appropriate advice and guidance, self-managed super funds could potentially be the next area we talk about as possible fallout because of the property and the gearing inside those funds.
“Every person has a unique situation. In some cases it may not be in their interests to have this property asset irrespective of the returns they think they are getting.”
He says the spruikers, reported to be using hard-hitting pressure tactics, have only one objective and that is to sell property.
“And if you’re aware of that and you accept then that’s your choice and you accept responsibility for that,” he says. “But I don’t think many people are aware of that.”