Real estate agents should tread warily when it comes to promoting self-managed super funds as a reason to purchase property, writes Naomi Mitchell, partner at accountancy and advisory practice Younis and Co
NOW, MORE than ever, self-managed superannuation funds (SMSFs) are becoming a popular option for individuals looking to bolster their retirement savings and diversify their investments. The most recent data from the Australian Taxation Office (ATO) shows that there were over 840,000 SMSF members as of June 2011, and that as of March 2012, $14.868 billion in residential property assets were being held by SMSFs – a jump of over $4 billion since June 2009.
The increased use of SMSFs has already had some major impacts on the real estate industry, and further effects will likely be felt in the future: most notably, increased access to property finance creates the potential for more property investors, and there is a strong possibility that investor demographics will begin to expand as members grow.
It is unlikely that regulation of SMSFs will become more relaxed (it can’t; it’s people’s retirement), but the frequency in which real estate agents are required to comply with SMSF regulation could very well increase.
What this means is that real estate agents will need to become more educated – not just on the way that SMSFs can be used to purchase different property types, but also on the limitations, pitfalls and dangers surrounding this relatively new and complex investment avenue.
What steps should or shouldn’t a real estate agent take in regards to marketing and giving advice about SMFSs as a potential property investment tool?
DON’T ACTIVELY MARKET
The safest approach for real estate agents is to refrain from actively and visibly marketing SMSFs as an investment option. An agent should never represent him, or herself to be capable of advising on SMSFs unless they are qualified to do so (for example, if they also happened to be a certified expert in the area).
There are a number of important reasons for this, the most important of which is the negative legal and financial implications it can have on clients or prospects.
Take, for example, an agent who advises a client that it is possible for them to purchase a property in their own name and transfer the property into an SMSF at a later date.
The client might then go ahead and secure finance from a lender to purchase a residential property, believing that if they did encounter liquidity problems down the track, the property would be able to gain protection via transference into an SMSF.
The reality of this scenario is that transferring the client’s property into an SMSF would be impossible, because SMSF laws preclude a super fund from buying residential property from a related party. Consequently, the investor would be left to devise some sort of short-term and long-term strategy for protecting their assets.
This is just one of a multiplicity of examples of where agents can potentially lead their clients or prospects into trouble by providing misleading or incorrect advice.
Aside from the inherent dangers to investors, some agents may also place themselves at risk of potential liability under various state and federal laws if they misleadingly induce their clients or prospects into error. So, unless an agent is absolutely sure of what they are advising on, the best option is, arguably, not to advise at all.
This is not to say that once an agent has a client or prospect in their office that they can’t inform the client or prospect that SMSFs can be a potential finance option for investors in particular circumstances; it simply means that an agent should not actively push the investment potential of SMSFs nor promote their own abilities – via marketing, advertising, PR, or direct pitching – to administer advice on the subject.
EDUCATE, RECOGNISE AND REFER
While I’ve reasoned as to why real estate agents shouldn’t directly market or advise on SMSFs, there is considerable value in agents knowing how to pinpoint clients or prospects that may be suitable for the SMSF option – so that they can then refer these clients or prospects onto appropriately qualified advisers.
The referral process can deliver two potential benefits to agents: Firstly, it may help them to build strong networks with finance professionals – something which could potentially result in reciprocal referrals and increased leads; Secondly, it allows them to put clients and prospects on a path towards a potentially beneficial investment avenue – an avenue that can be sourced directly back to the referring agent. However, in order to fully exploit the business potential of these referral processes, real estate agents will need to start thinking more laterally about the target markets that are associated with SMSFs and properties.
Super has traditionally been viewed as a financial mechanism for older generations – however, this perception appears to be changing, particularly as more people become comfortable with the idea of managing their own fund.
For example, many individuals in their mid-to-late twenties are now looking to use SMSFs to secure property investments at earlier points in their lives, and there is also a growing trend towards purchasing or transferring family business properties into SMSFs, due to the liquidity, taxation and portfolio expansion benefits that can result from such.
In addition to keeping up-to-date with evolving demographics within the SMSF market, real estate agents will need to educate themselves on the legal and regulatory frameworks in which SMSFs operate; only then will they be able to truly identify who is appropriate for a SMSF referral.
The ATO, which is the main regulator of SMSFs, has a range of publicly accessible publications (both online and offline), which summarise the legal requirements and complexities pertaining to SMSFs.
These publications are a great starting point for real estate agents wanting to learn the fundamentals behind SMSFs – however, once again, agents should be focussing on building their professional alliances with SMSF experts so that they can educate themselves through the appropriately qualified channels and sources.
Below are some of the key factors that real estate agents should look out for when considering whether a client or prospect might be suitable for an SMSF referral:
The client or prospect must be a member and trustee of an SMSF;
The residential property must be for commercial or investment purposes, not for the fund members or their associates to live in;
The client or prospect must be capable of and willing to manage their SMSF obligations: they must directly be involved in the decision making; execute the accounting and administration of the fund; possess a clearly defined investment strategy; understand the potential penalties involved; and keep up-to-date on relevant legal and regulatory changes.
THE BOTTOM LINE
As the super industry continues to evolve, more real estate agents will likely look to unlock synergies between property investment and the SMSF sphere. While it will be possible for agents to capitalise on growth within the sector in a number of strategic ways, it will be extremely important for them to understand their own limitations and obligations in regards to SMSF marketing and advice, and recognise the appropriate point at which they should be referring clients and prospects onto qualified finance professionals.
To learn more, make contact with a qualified accountant. A powerful partnership might ensure that they could deliver more than the obvious benefits.