Market Assessment #3 : Are real estate agents worse than FAs ?

 

Some parvenu wannabe on social media, incensed at my loathing for FAs, publicly challenged me to air my views about real estate agents, so this article is about my response to this challenge.

I don't have any beef against real estate agents. Yes, they spam my mailbox with letters addressed to "Owner", but I dump all these flyers into the rubbish bin located right in the middle of the PO Box area in my condo. Real estate agents also have to find a way to play up the real estate markets, so in any secondary school reunion, expect real estate agents to work very hard trying to convince you to transact regardless of whether it's a buy or sell transaction. The trick is to simply avoid asking the barber whether you need a haircut and read books on real estate instead. 

If anything, if I do end up doing conveyancing work, I would even end up selling to them!

To assist me in writing this article, I wound up reading Direct by Kathryn Judge which discusses the impact of middlemen in our economy and how we can find creative ways to defeat the information asymmetries that exist in our society today. Apparently in the US, real estate agents are likely to be more deplorable than FAs - whoever sells real estate actually pays 5-6% when they sell their property which incentivises wasteful activities like mass mailing.

My real estate friends are actually quite nice to me given they get front-row seats to see what I enjoy saying about financial advisors. But when I am not around, I get wind of very amusing attempts to get some business done. I think in this climate of rising interest rates, real estate agents are seeing a potential drop in sales and they have been trying to talk the markets up. I think it's fine to promote transactions when interest rates are going up, but when you do this to an old friend, you must be seriously trying to insult his intelligence or selfish as hell. 

But who am I to judge? No one has ever actually tried to do this to me.

One important point raised by someone else is useful when comparing real estate agents to FAs. Real estate markets are inefficient as every home is unique and idiosyncratic. This means that if you can find a real estate agent that really understands your needs and financial situation, and you act on their recommendations, you are more likely to profit immensely from your decision if the recommendation was made in good faith. This is opposed to financial advisors who can take a big cut of commissions when they sell a product to you, and there's very little leeway for the product to earn decent risk-adjusted returns net of fees. The best an FA can do for you is to minimise fees, but it takes a true friend to recommend you a "buy term and invest the rest" plan when other products promise much higher commissions. 

You don't have to take my word for it, just observe the folks around you :

• I have only engaged one real estate agent in my whole life when I bought an EC and I'm sitting on $600,000 in gains today.
• On the other hand, I see so many folks now in a state of panic when their over-confident FAs placed their funds in China and Technology stocks without any consideration for the underlying volatility. A professional FA is supposed to manage your risk for you, not take bold momentum or trend-following bets with your hard-earned money.  

On local markets, I really cannot imagine the carnage that will occur tomorrow after the unveiling of new leadership in China. Hong Kong stocks tumbled because this does not look like a team that will promote capitalism and business. As Singapore is highly correlated with Hong Kong, I think we should expect more capital losses but I'm hopeful that healthy bargains will be everywhere in mid-November, when I may make my first move after retreating from all leveraged accounts. 

I do hope that I will turn out to be wrong.