Do enough financial advisers understand margin lending?

Part two of a Money Management round-table recently discussed whether financial advisers were appropriately experienced and educated to provide appropriate advice on margin lending.

Part one: Margin lending following Storm Financial

Mike Taylor, Money Management: Which actually brings me to the third question here, and it relates to everything that’s been discussed actually, which is advisors, are they appropriately experienced and educated to provide appropriate advice on margin lending?

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I look at our panel here and you’re all actually pretty well versed in the field.  That’s why you’re on the panel. 

But in your experience, are some of your colleagues up to actually providing the right advice?  Wayne actually made a reference there so I’m going to throw straight to Wayne.

Wayne Lear, Shield Wealth: Look, the answer’s no.  I think the way in which the industry’s going into the profession - now I say no across particularly the younger planners. 

I’ve got two young planners at the moment straight out of the ANU Economics Department.  They still don’t know how to spell imputation credit.  Well they probably do, being economics majors, but what I’m saying is that there is a need for a lot of education.

I think this is where the regulations should come in and I think they already do. You must have some sort of qualification to be able to offer margin lending within your licensed dealer, and I just think the more education on this area the better. 

Generally speaking, I don’t think a lot of planners really do truly understand the pros and cons of this.

George Deva, Ord Minnett: I’m going to go on a different tangent, so of course they are Mike. And I’ll fly the flag for independent advisors as well as our competitors and say that the level of education and intellect across the industry I think is significantly higher now, post the GFC.

To Wayne’s point, I firmly believe that advisor behaviour is always going to be dictated to an extent by the way their clients are behaving, and increasingly clients post the GFC are more technically savvy, they’re more educated, and we’ve seen that they’re more liquid in where they transfer their wealth between one provider and another.

So the challenge for advisors is to be able to again balance off the education and the appropriateness of gearing as a strategy and really again, educate on the need for diversity, the importance of asset allocation.

Planners do this particularly well, and really have that degree of sophistication so that clients aren’t just simply told to trust their advisor. 

They have a comfort in what their advisor is doing, that there’s a conservative degree of gearing, there’s diversity in the portfolio that they’re not at risk of margin call or the catastrophic results we saw either during the GFC or through Storm. But I think overall, they absolutely have the capability to advise on it.

Michael Dale, Fiducian: Well, you know, I think the truly professional financial planner does educate themselves. 

I mean, they would think the first person I have to work on is me, so I become that kind of advisor that investors want to come and see. 

So I’m positive that the truly professional financial planner, and I’m sure Andrew would agree, would be well versed in all strategies. If they’re not, well they’re not truly a professional. 

So I mean really, if you look at the fundamentals and the bones of gearing, it’s not difficult.  You can break it down very simply. That’s my belief.

Andrew Mckee, Australian Unity: I’m with Michael.  I’d like to think that there’s a high proportion of advisors out there who are professional and have a really solid understanding of all of the strategies that they would employ for clients.

The advisors that I know fit into that category.  So from that very small cross-section, I’m confident that advisors are there, but it’s a broad community advice land.

I think that licensees have a job here as well to provide technical support, training, education for their advisors as well to make sure that they are confident in this area - confident and competent. 

So I think it’s partly an advisor taking responsibility for themselves, but licensees also have a job in helping their advisors in this area.

Alex Tullio, Leveraged Equities: It’s interesting isn’t it?  I think we probably see it from a bit of a different angle, because as I said before, we deal a lot with professionals - licensees, stockbrokers, financial advisors, and I think it probably comes down to experience.

Perhaps you might have mentioned before Michael the difference between theory and practical application, which I guess just makes common sense doesn’t it? 

So as we all know, advisors have to do extra modules now to be specialists from the margin lending perspective and we actually do quite a bit of work with Kaplan for example to do modules in that education.

This is something we actually take quite seriously. I guess we feel that beyond that education and that theory, there’s the application of case studies and actually working with our partners to have the right messages for financial advisors or stockbrokers, that they can then also use with their customers. 

So it is a very central theme isn’t it today, that this education piece is something that we all need to take responsibility for, and it doesn’t just stop with an extra module through Kaplan, even though that’s a great foundation. 

You need to keep working on it and that practical application I think is so important.

Wayne Lear, Shield Wealth: Just following on from there, within our own group we’ve got about 90 planners and I would like to think that they’re all professionals, they’ve all been highly trained, some of them have been around as long, if not longer, than what I have, but a few actually offer margin lending. I’ve asked a few of them why is that and they’re just “not familiar with it”. 

Understand the mechanics, but not familiar with it.

And I think if you’re used to driving a certain vehicle, you’re familiar with it, you feel confident with it and therefore where you see an appropriateness for it you will advise on it. 

But if you’re not familiar with it, then it’s just that little bit extra confidence that you need in advising and I think that’s a real task for Leveraged Equities to get out there and make those relationships a little bit stronger amongst the advising community.

Michael Dale, Fiducian: Wayne, if you had asked me that question, the answer I would have given would be that number one, that I know every one of my clients and whether it’s 80 per cent or 90 per cent or 100 per cent of them can achieve their objectives without borrowing and they are comfortable with that. And so, if I can do that for them, why would they borrow. 

And so, the answer certainly wouldn’t be, I’m not comfortable with it.  It would be all about the client. 

Wayne Lear, Shield Wealth: Look, every planner’s client base is different and it’s a very complex area, and the sort of people you’re dealing with is all different, and I would say there is a certain client base where this would apply to and there’s other client bases, like yourself, where it wouldn’t apply.

I mean, pre-GFC 60 per cent of my business was margin lending, 40 per cent SMSF.  Now it’s like 80 per cent SMSF and 20 per cent margin lending, and that’s just because all of my clients have got older and they don’t need it, but I’m unwinding more than what I’m putting in at the moment you see, because they don’t need it now. So it’s horses for courses isn’t it?

But the point I was trying to make though, where there is somebody who’s coming in like a young professional where it’s absolutely appropriate, I’d like to think that we’ve all got the courage to go, “Listen, have you considered this strategy?”

Michael Dale, Fiducian: Well it has to be one of the options and as soon as the options are laid out the client will say, “Well I really like that.  I’m not quite sure about this.” It comes down to the individual.  We must start with the end in mind. We must go to the other end and work backwards rather than, have I got a great thing for you.

Alex Tullio, Leveraged Equities: It’s interesting just what you say for younger professionals, because one of the trends that I guess we’re starting to observe is actually more of the Gen X’s and Y’s starting to use gearing as a strategy, and we sort of like to call it internally, you know, it’s like an interest-only mortgage.

So particularly if I’m living in Sydney or Melbourne, I’ve got a high level of income, I might still be living with mum and dad, saving up for that first deposit or getting my foot in the door, and let’s face it, they don’t want to actually live out in the burbs do they? 

They want to live in town in a good suburb.  So we’re actually starting to see this trend of, you know, I still want to make my wealth work for me and I do have the right goals and objectives and I’ve got the right timeframe.

Might I add though, they’re doing this very conservatively.  We’re seeing sort of 30 per cent sort of gearing levels or under, they’re the blue chips.

There’s nothing really radical about this, but it just seems to be a trend for us in terms of these X and Y’s who are using this as, I guess, a pre-cursor to saving up enough for a mortgage, or whatever goal they want to achieve in life.

Communicating strategy

Mike Taylor, Money Management: Wayne made a very important point before with his graph there and charting one of his clients, and very much the bottom line of that was time in the market, and I guess that’s part of the communication piece with the client, isn’t it, that you know, there are no quick runs here.  You’ve got to dig in.  It’s a test match. It’s not a 20/20.

So I guess again, it is a client education exercise and as Andrew rightly says, your client’s got to have the right mindset. But I wonder too whether if you look at where margin lending money is being spent, it’s Australian equities, and that’s a very, very narrow asset allocation. 

I’m wondering whether it needs to be broadened out, whether given the growth that we’ve seen in the past year in US equities and elsewhere, do we need to broaden out, does there need to be scope?  Alex, I just wondered what are your views on that?

Alex Tullio, Leveraged Equities: I think it’s a good point and even though we are starting to see I guess some more demand, and might I say it’s quite slow yet for international equities and the like, so I think definitely people’s minds are turning that way, and some of our partners do more than others, so I think definitely it’s going to become more mainstream but at the moment we’re not seeing it to be a really big trend. 

You’re right. It’s very much on the Aussie equities and that’s probably top 50 even.

George Deva, Ord Minnett: I think any appropriate asset allocation will have some degree of international exposure and so again, to the quality and appropriateness of advice, that’s absolutely relevant. 

I think the reason why we see such a concentration within the wealth management industry in gearing against Aussie equities is because that’s what our infrastructure supports, and so all our dealer groups, the large institutions, all the research is primarily around domestic equities.

We’ve seen the trends, as Wayne said, towards the self-managed super world, the importance of imputation credits and the tax benefits of Aussie equities, buy-backs and so forth, are very paramount for both advisors and clients. 

So I think it’s very deliberate that we have a bias towards that advice.

The challenge for product providers and lending providers is to start bringing around the appropriate infrastructure to support international equities, ETFs and so forth. 

Andrew Mckee, Australian Unity: I get a little nervous that we’re talking about gearing on international equities after we’ve just had the sort of returns on international equities that we’ve had, 40 per cent plus type returns. It strikes me as perhaps the wrong way around. 

Now might not be really the time we should be thinking about it.

I think all the growth orientated asset classes are candidates for gearing for the right person. The direct equities, the margin calls are probably easier to implement, but obviously margin calls are something that as an advisor you’d hope to avoid if you can. 

But yeah, I just think it goes into the mix of assets that would be appropriate to gearing.  I mean, you only want to gear into assets that have reasonable growth prospects.  So if international equities is one of those, I’d just caution on timing right now. 

Wayne Lear, Shield Wealth: I sort of agree and disagree with Andrew because there are specific international funds out there that still haven’t had growth yet because they’ve moved in different areas. I think that again comes down to the knowledge that the advisor has around what is out there.

I think a lot of the growth in the international equities in the last little while has been the Aussie dollar falling.  I think the Aussie dollar has still got a bit of a way to go as well. 

And again, it just comes down to us as professional planners educating the client about asset allocation and diversification and all those other, you know, really basic good stuff, and I think if anything moving forward, the Australian market’s going to slow and the international will just keep going up a bit.  That’s my own personal view.

But yeah, I’d certainly be encouraging diversification. 

Michael Dale, Fiducian: That’s the key.  Why would you move away from the fundamentals, you know, if they’ve been there for a hundred years. There’s nothing here under the sun, so why wouldn’t there be safety in numbers. Why wouldn’t you diversify?