Betting the bank

When it comes to investing, the risks may be high, but getting a second opinion the difference in avoiding investment pinion can make all vestment pitfalls

It is a perfectly lovely suburban home in a good neighbourhood — an apparently ideal investment.

The business advisers say they will look after the pest inspection, the building report, the financing, legals and transfers. They’ve even offered to manage the post-sale leasing of the property.

All that is needed is to provide the deposit and, after a suitable period, sell the home and collect the profit.

When looking for how to best secure your financial future amid the often frantic pace of practice, the convenience of such an arrangement is incredibly attractive.

It’s almost too good to be true for the modern medical professional. Sadly, for many Australian doctors, it has been.

The scenario above is one sketched by Julie Smith, director at accountancy and advisory firm William Buck (Qld). She has seen medicos lose up to $150 000 after paying what turns out to be a huge premium on the market value, on the basis of poor property investment advice.

“The doctor is left carrying a very expensive property that, if they sell, they’ll crystallise a lot of losses”, she says.

“It’s not all property and it’s not necessarily a trend, but when it happens, the quantum of the oversell is quite spectacular.”

There are myriad stories about where people go wrong in their investment choices — which can range from pine trees to penthouses. And there are myriad reasons for this — it may be a result of bad advice, too much debt or the idiosyncrasies of the market.

So what are the best steps for avoiding financial disaster? And who can you turn to for advice?

The pitfalls

Many of the more disastrous investment stories involve property. Widely considered a good wealth creation tool, it can appear less fickle than other investment options such as the share market. However, bad decisions can still be made, triggering sometimes critical consequences.

Steve Wilkie is a director at Bongiorno and Partners, one of the largest and oldest financial services firms catering specifically for the medical profession.

He says that when it comes to property, investors need to make sure they understand the product they’re investing in; what the risks are and what will happen if things don’t go according to plan.

Mr Wilkie points to the Gold Coast property market as an example of where ups and downs can occur and panic won’t help.

“Regularly, there are booms and busts in the property market up there. Someone agrees to buy a new property off the plan for $500 000 and they pay their 10% deposit or whatever it might be”, he says.

“When the property’s complete, the bank values the property and, instead of the original $500 000, it’s only valued at $400 000.

“The investor then needs to make a decision. The bank will only lend a certain proportion of that $400 000 so they will have to find the additional cash. Can they afford to do that, or do they walk away and lose their deposit?”

Of course, he says, the converse could also occur and the value of the apartment may increase during the development phase.

Bongiorno has had its own recent problems with property-based investments. In 2009, it reached a settlement, without any admission of liability, with the Australian Securities and Investments Commission to compensate investors in relation to advice provided regarding one of the Westpoint investment products — York Street Mezzanine Pty Ltd.

Bongiorno was required to pay $2.6 million, returning as little as 43 cents for each dollar of their original investment.¹

Beyond property, there is a long list of other failed investment schemes in which members of the medical profession have found themselves mired. A decade ago, doctors were among many pouring money into managed investment schemes (MIS) run by Great Southern, Timbercorp and other such groups.

These saw money ploughed into tree plantations and being rewarded with a 100% tax rebate. But the investments never reached their production targets and returns were dependent on a continuing flow of new investors joining the scheme.

Ultimately, the schemes collapsed spectacularly taking most of the investors’ money with them.

“A large chunk of those investments were made with borrowed money”, Peter Alvarez, director at Navigate Wealth, says.

“When the schemes went bust because people stopped borrowing because of the crisis, a lot of the people were left with their lawyers there, but no assets.”

Outsourcing expertise: who to trust

The MJA was told that some groups in today’s financial services industry take the attitude that doctors are something akin to “commodities”, ready to be exploited.

“When you come out of university, there are so many businesses that want to sell you a car, or a this or a that”, Ms Smith says.

“All of the young kids get up to their eyeballs in debt and then, as you earn more money, they want to sell you the latest property deal, the latest loan or the latest this or that.

“It creates a whole world of issues. And it can be very hard to know who to trust.”

Mr Alvarez is more direct.

“There are people doing the right thing, and then there are crooks.”

It means that the most important ingredient in a sound investment strategy is finding the best advice.

“Unless you have somebody in your corner who provides a sounding board and really good advice, sometimes it’s very difficult to see the pitfalls before you jump”, Ms Smith says.

The Abbott government is now in the process of considering submissions regarding its amendments to the Future of Financial Advice (FoFA) legislation governing the financial services sector.

The intention is to lessen the financial and administrative burden of the original FoFA requirements. However, some are concerned that in doing so it will reduce the consumer protection the legislation was designed to create.

Even today, there are notorious stories about real estate developers paying commissions to financial advice firms to boost sales at the expense of any retail investors.

Whatever the outcome of the FoFA amendments, take the time to find the right person or organisation and don’t be afraid to put them through their paces. The adviser should know the medical industry well as well as knowing the financial services field.

• Ask them what they recommend and why
• Ask industry-specific questions to determine their knowledge level, eg, “What should I do with my Practice Incentives Program income?”, “How should I deal with my private health fund debtors?”
• Determine what the cost will be in the long run
• Ensure all commissions and rebates are disclosed. Are there different commissions depending on which product is chosen? A good adviser will initiate that discussion.

Even after finding a good adviser, it’s important to ensure there are rigorous checks on any advice provided as well as on the procedures behind any investment.

“The biggest risk factor, if you were wanting to point your finger at one major issue, is doctors getting their financial advice from the same firms that they get their accounting advice”, Mr Alvarez says.

Nevertheless, the convenience and efficiency of having the full gamut of financial issues dealt with by one group is very attractive when there are already not enough hours in the day.

If it is a one-stop-shop financial services organisation, ask about the independence of the organisation’s different arms: Would accountancy be willing and able to tell financial planning that their latest concept was flawed?

Ultimately, the simplest advice offered by the experts when it comes to avoiding bad investments, is to ensure you have a second opinion before laying bets of any kind on future financial security.

Many medicos make good investment choices, but even the best should take care to get a second opinion before going ahead.

As Ms Smith puts it: “If it is really good, a second opinion is not going to hurt, is it?”

1.  Australian Securities and Investments Commission. Actions against financial planners. ASIC, 2009. https://westpoint.asic.gov.au/wstpoint/wstpoint.nsf/byheadline/Actions+against+financial+planners?opendocument#bongiorno (accessed Mar 2014).