Industry grapples with leverage dilemma

Some financial planners have been acting inappropriately when recommending leverage strategies, particularly the use of margin loans to their clients, according to a survey conducted by Money Management.

The survey, conducted amid the debate surrounding the collapse of Storm Financial, also suggests that financial planners should be required to hold a specific qualification with respect to the use of leverage and margin loans.

The survey, conducted among subscribers to www.moneymanagement.com.au, attracted more than 500 responses over just one and a half days.

Asked whether advisers should be required to meet tighter guidelines with respect to margin loans and those whom they should be offered to, a strong majority of respondents (nearly 70 per cent) stated ‘yes’.

Equally important, there was strong agreement among respondents (more than 96 per cent) for the proposition that, in light of recent events, some planners had clearly provided inappropriate advice to their clients.

The survey results have come as senior figures within the Australian financial planning industry struggle to come to terms with how the question of leverage and margin loans should be treated.

The chief executive of the Financial Planning Association, Jo-Anne Bloch, has been criticised by industry commentator Paul Resnik in this week’s Money Management for comments she made earlier this month supporting the legitimacy of leverage and margin lending as a planning tool.

Bloch’s views would appear to have some considerable validity in circumstances where more than half of respondents to the survey said they had provided advice with respect to leverage in the past six months.

However, among those who had provided advice with respect to leverage and margin loans, the vast majority of respondents said they had only done so with respect to clients whom they regarded as being experienced or high-net-worth and those who had specifically requested such a strategy.

Fewer than 2 per cent of respondents said they had been in the business of recommending leverage to all client types.

A number of respondents went to the trouble of e-mailing Money Management to express their views on the question of leverage and margin lending, with most supporting the Bloch view that it represented a legitimate tool but adding that it needed to be handled carefully.

Virtually every respondent who opted to offer comment on the issue argued leverage should only be offered to clients who fully understand their options.

While supporting the need for planners to be better educated with respect to recommending strategies involving leverage and margin loans, those respondents who chose to make additional comments were generally opposed to the Government imposing further regulation on the industry.