Matching leverage to the right clients – Margin Lending Roundtable Part 4

The global financial crisis and the collapse of Storm Financial placed a spotlight on the need for adviser education and the reality that leverage is not appropriate for everyone, according to a Money Management roundtable.

MT: Mike Taylor
         Managing Editor
         Money Management

JM: Julie McKay
        Senior manager, technical and research
        Leveraged

KF: Kevin Flynn
        Director and Financial Planner
        Epacris Securities

WC: Wai-Yee Chen
          Senior adviser, Ord Minnett
          Private Wealth

KH: Keith Hildson
         Head of distribution
         Leveraged

EE: Earl Evans
        Head of wealth management
        Shaw and Partners

MT: Okay. Obviously the advisers at this table are very experienced in gearing and margin lending. Not every adviser is. On that basis, is there a need for greater education of advisers around the technicality of it and the type of client they should be talking to about it? Is there a knowledge gap there? Has enough focus been placed on getting the vast bulk of advisers up to speed on it? I'll start with you, Kevin.

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KF: Yeah. It's a difficult question to answer, but I think many dealerships are very conservative when it comes to this. They've seen the damage that the Storm's [Storm Financial] done. There's compliance risk, there's all sorts of issues. So I think generally speaking, the dealerships and the major fund managers, major dealership groups, are quite conservative and probably overly conservative. Even for people like us who've been doing it for so long, [we] still require a long level of compliance and complexity in our file notes and in our SOAs and in our plans.

It does take experience to deal with this sort of strategy. Our dealer group through Charter, through AMP, will only let you give advice in relation to gearing unless you have reached a certain level of qualification. I think that's important because I think a little bit of knowledge in the wrong hands can cause a lot of damage. You can get a client into a lot of trouble very quickly if you don't know what you're doing. So I think ultimately the dealers are conservative for a reason; to stop those people perhaps advising on strategies they're not familiar with.

But I think overall there probably needs to be a bit more education, and a little bit more education focused on the full scale gearing, the more moderate gearing, and even the starting off, the low end of gearing. I still think a lot of advisers have, certainly in my experience, seen it, heard about it, listened to it, and said, "It's too complicated. I'm not going to give advice in this area," and I think they're missing out on a lot of opportunities. So I think the dealers will get it right ultimately, to get the right mix between allowing the leash to be not too long but allow the leash to be there just to hold everyone back a little bit, because I think ultimately they're concerned about the litigation and the things that'll go wrong if it's not done correctly.

EE: How do I say this delicately? There definitely should be further education, in my view. It's a segue component to probably the question, and that's the education period for advisers. It's like anything. I think human nature is one that you always — most people want to cram for the exam the night before as opposed to the right thing to do, is to do it over the period of time that you do your study courses. I think our industry is in the same [boat], whether it's planner, broker, whatever it might be. I believe personally we should have far more stringent, and I think we're going down a path, of better education for advisers.

I'm just absolutely flabbergasted, to be frank, as an industry participant, that we're six to seven years past the GFC and we're still putting things in place. Again, talking — mentioning things like Storm Financial, it's such a distant memory. I think we're doing better as an industry but I think we need to do far better. I think some of the things planned around the education process for advisers over the next 12 to 18 months, I personally think is a very good thing. It's better for our clients, it's better for the industry.

There's been a few bad players that have put the industry down into the mud, and a lot of us have come to work with the completely best intentions for the client. The industry's also become a bit of a whipping post, to be frank, for the politicians, which is very disturbing for the honest practitioners who come to work every day to try and do the best thing by their clients.

So long-winded answer but, yes, there should be more education. I think again, going to what Kevin said, the advisers that actually are not educated in the process are actually doing a disservice to their clients. You've got to come to work every day with an obligation to do the best thing by your clients, and for that being the case, you should try to be as up-skilled as you possibly can, period. You should always be trying to better your education, to help the end client.

KH: As a responsible product manager, education is the key strategic plan for us, because we recognise that without education, I guess demand dries up and so forth because there's no knowledge of the product. There's that three-pronged strategy in terms of advising or educating the adviser around the product and how it works, what potential strategies it would suit. Secondly, educating the adviser on how to have those conversations sufficiently with their clients. Thirdly, around educating the end-consumer so that they can understand what a gearing strategy is, and potentially go and talk to the adviser on how that works and form a plan going forward. I guess it'll leverage what we've done, tactically is webinars, trade notes, education articles on our website, et cetera, and we continue to educate.

JM: To me, it's that middle point that's the real difficulty with advisers. I mean, there's been a lot of different training on how does a margin loan work, what is a margin call, how do you calculate, all this sort of stuff. I think there's a lot of material out there. I think putting aside whether they cram for it just to get the exam right and they just forget it or whatever, whether it's effective education, but to me, it's that second point about how you have the conversation with the customer.

It goes back to what we were originally saying first in terms of how do you keep the customer focused on the long-term — medium-to-long-term goal, and not get distracted by headlines in the newspaper and volatility and whatever. To me, that's a much broader piece of education in terms of just advisers having experience of the market and what it means, having gone through a downturn, knowing that the current volatility is, okay, a little bit more than usual but not abnormal.

READ THE OTHER PARTS OF THE ROUNDTABLE HERE:

Leverage a valid strategy if used correctly – Margin Lending Roundtable Part 1
Leverage and volatility a safe mix? – Margin Lending Roundtable Part 2
What a typical margin lending client looks like – Margin Lending Roundtable Part 3