Do you recommend margin lending products?
Do you recommend margin lending products?
No, because while gearing gives advantages there are some risks involved.
What happens if rates rise or the investment loses value? The borrower could be facing a margin call.
I am aware insurance will cover loss of earning in sickness or accident but what happens if the borrower loses their job through sacking or retrenchment?
What happens if tenants fail to pay rent on an investment property or trash the place? And what happens in the event of a failure of the company in which the bor-rower has shares?
Many companies have borrowings of their own and therefore gearing into another geared investment adds a new level of risk.
If gearing or a margin lending product is to be used, it should be tailored very spe-cifically to the right clients and not used as a panacea for all and sundry.
Robert Shaverien
Bleakleys
Sydney
I would recommend margin lending as part of an overall wealth accumulation strategy for appropriate clients who are prepared for long term commitment and are involved in other investing as part of dollar cost averaging.
This would see them making regular contributions into sound investments, so when the market drops, they can buy further stock at lower prices and reduce the com-plete cost of their portfolio while increasing returns.
An important part of the role of the planner with margin lending then is to help cli-ents not get nervous in a market decline and see the positives and see that their in-vestments are sound.
To this end, we even have a number of retired clients with margin loans that are geared to 30 per cent, which negates the tax effects with imputed tax credits from their share portfolio.
On the other hand, if we advised against a margin loan and the client insisted, we would not take them on as a client.
James Doogue
James Doogue Securities
Perth
“I have to agree with the sentiment of the recent ASIC consumer alert on margin lending — it’s a tricky business.
Financial planners are better equipped to pinpoint the sort of assets investors should gear into. For example, they would be reluctant to gear heavily against fixed interest securities or managed funds heavily invested in fixed interest. Fixed interest securities have lower yields than the interest cost of borrowing.
And some managed funds are already geared — you wouldn’t invest in something double geared. This creates an alarming level of gearing.
On the capital side, there is a real risk of total loss of capital. The rate you lose money in margin lending is faster and even a small downturn in the markets will cause a margin call if an investor is geared too highly. A financial planner will caution against too high a loan to value ratio and would always advise their clients to stay in the market for the long term, or at least for one full market cycle.
I’m very supportive of ASIC’s view that while returns on gearing can be higher in the long run, the unsophisticated investor is at risk.”
Jonathan Harrison
Hillross Financial Services
Sydney
