A particularly egregious example of poor investment advice occasioned by a negatively geared investment recommendation has been exposed in a recent determination of the Financial Services Ombudsman.
Over $70,000 compensation was awarded to a couple who were advised to invest in rental properties which returned an under-performing rental yield, and with gearing which exceeded 100% of the properties’ value.
It was found that the advice was not consistent with the couple’s assessed risk profile, insufficient information was given about the risks, and that even the tax calculations were based on erroneous assumptions.
The compensation from the adviser was based on an assessment of the couple’s losses.
Impartial advisors have long lamented the simplistic assumptions used to justify many negative gearing investment decisions, almost always taken with a careless disregard of attendant risk factors.
These same advisors and smart investors also recognise that used intelligently, gearing can be a potent tool in magnifying investment yields.
However, the popular myth that the magic “negative gearing” wand is an easy pathway to wealth has mainly been encouraged by property spruikers, financiers and others with a vested interest in the associated funds flows.
This recent case and the surrounding circumstances is reviewed in an article from Stuart Jones at Thomson Reuters who writes:
If the property market takes a turn for the worse, financial advisers who have recommended highly-geared strategies could potentially become the target of investors who suffer a loss on their investment. The duty of care owed by financial advisers when providing negative gearing property advice was highlighted in a recent determination by the Financial Ombudsman Service (FOS) reported in Thomson Reuters Weekly Tax Bulletin (Issue 7, 17 February 2017).
Read the full article here: taxinsight.thomsonreuters.com.au