Education goes beyond the margin

To support and complement the findings of the 1999 Ralph Report, the Australian Securities and Investments Commission (ASIC) was charged with implementing tighter controls in terms of the licensing of financial services organisations and also in regard to the training and assessment of competence leading to the authorisation of planners.

As a consequence of this, there has been a much greater emphasis on education and training of those who are providing advice to the retail public.

As we know, many market sectors are now covered under ASIC’s Policy Statements. As a result, those providing, or at least seeking to provide, advisory services to retail clients in the areas of insurance, superannuation, securities, foreign exchange, derivatives as well as deposit advice and so on, are now required to demonstrate their competence.

More importantly, they are also required to undertake ongoing continuing professional development (CPD), each and every year for the duration of the time they continue to provide such advice to clients.

Slipping under the regulatory radar

One area that has not directly fallen under such mandated requirements relates to the use and provision of margin loans for leveraging investments.

Margin lending has to some extent slipped under the radar of legislation, and therefore there are few regulations pertaining specifically to margin lending.

A great credit to the margin lending industry is the fact the industry is actually ahead of the regulators.

Some providers, including St George, have created margin lending education courses that not only attract credit points towards Financial Planning Association (FPA) continuing education requirements, but are also pre-requisites for advisers wishing to write margin loans with those providers.

However, there are, unfortunately, margin lenders who will sell to any intermediaries and therefore to any end clients, given there is nothing specifically regulating advisers’ responsibilities and clients’ rights when it comes to margin lending.

In recent years, margin lenders in Australia have principally been very conservative and the

market has been fairly buoyant.

The margin lending market has grown very rapidly under fairly good market conditions and perhaps legislated education hasn’t been as crucial as it will become in the future.

With a growing margin lending industry, and relatively few margin calls in recent market dips, there’s been no real test of the end client’s understanding of margin lending.

Under such ideal conditions, there probably hasn’t been much of a test of advisers’ understanding of margin lending either.

Because the margin lending market has developed so rapidly in the past five years, the market generally hasn’t focused enough on the adviser, and obviously therefore, consumer education. We didn’t have to educate in order to sell.

As the margin lending market in Australia grows and approaches $30 billion, loan sizes increase and products become more complex, with an increase in features such as protected loans and options, education will become an ever more important issue for the margin lending market and its consumers.

Risk minimisation strategies

Education isn’t just about describing margin lending — it is about risk awareness and minimisation strategies and how a margin loan can best be used to take advantage of any downturn in the market.

Solid margin lending education for intermediaries, which they communicate to consumers and investors, will become vital in the years ahead, allowing those that are well prepared to take advantage of factors such as interest rate movements, market downturns and potential increases in margin calls.

Of great concern is that the end client receives sufficient education from their adviser or directly from the product provider.

In my view, there is absolutely no doubt that both the consumers of the product and, particularly, the advisers recommending the use of margin lending must be fully educated about margin lending and especially the associated risks as products become more sophisticated.

There are not a lot of providers of education on margin lending.

However, it is significant that there are in fact some providers that do offer education to the professional community at no cost to that community.

It is important too, that such education be delivered by reputable organisations that do have the credibility and experience to deliver appropriate education.

Registered Training Organisations (RTO) that have listed competencies in appropriate financial services market sectors on their scope of registration should be sought.

Planners have a wide range of competencies with which they need to be fluent.

As a provider of margin lending education, we have found that typically most planners are quick to learn — having a reasonable understanding of margin lending.

But we have found that the actual detail embracing worked examples of margin lending generally, and particularly what a margin call might be in given circumstances, does help advisers to become fully literate.

Interactive training

We’ve learnt that interactive training enables advisers to test themselves against the system, creating an environment that fosters and encourages higher levels of competence.

Our experience shows that planners normally fall into one of two groups: those that are well educated and those with limited knowledge of margin lending.

Those with limited knowledge are unfamiliar with the concepts of loan to value ratio (LVR), how to determine maximum loan size, and what size fall in the portfolio will trigger margin call, for example.

As a first exposure to margin lending, many advisers using our online educational facility are challenged by the relationship between the ‘buffer amount’ and current portfolio value and the possible reasons for using margin loans and the possible outcomes.

Not surprisingly, we’ve found that planners pick up the basic concepts and calculations very quickly. They are also easily able to identify groups of clients for whom margin loans were not suitable. As you would expect, their numerical skills are excellent.

Even in the absence of regulation, advisers using our education modules show a thirst for excellence.

Given access to quality, free education, and the means to manage their own learning, advisers are taking full advantage of the opportunity.

The vast majority in the 30 to 60-year age group adapted to online learning like a duck takes to water.

They set themselves high standards; most were not satisfied with a score of 50 per cent or even 70 per cent, but aimed higher and kept studying until they had achieved their goals, given our system throws up different questions on each attempt.

We’ve found that planners see holding and updating their margin lending education as a form of insurance to their business. They also see it as a convenient way to earn five CPD points.

Education in general is of course one of the most important facets of advising.

Planners give advice, and the client still has to make an informed decision.

With margin lending’s capacity to magnify returns and losses, clients who are advised to leverage should have a good understanding of the potential outcomes of following that advice.

When we introduce the concepts of margin lending to advisers not already using margin lending, we commonly receive the following feedback: “I wasn’t aware how powerful it could be for my client; I don’t know what my dealer group’s compliance requirements (risk profile and so on) are for a recommendation; and I wasn’t aware how powerful it could be for my business.”

The approach the regulators have taken in requiring market professionals to keep abreast of developments in the industry by necessarily undertaking ongoing CPD is leading to the opportunity and indeed the requirement for the product suppliers to develop and deliver innovative, interesting and stimulating training support for the professionals in the marketplace, and that’s a great positive for the industry.

However, without regulation, there is the danger of a lack of consistency of educational tools and levels of content being

provided to advisers.

Future frontiers

There are two key areas for the future of margin lending education.

Firstly, a requisite, if not instituted by the regulators then at least by those providing the finance, to require that all advisers selling or recommending margin loans demonstrate their competence through satisfactory completion of an appropriate training program.

And secondly, a facility for the consumers of margin loans to also demonstrate their understanding of margin lending.

This could take the form of a retail version of the professional training program delivered by the loan provider or, alternatively, a similar program delivered by one of the competent RTOs.

However, the possibilities for innovation for interactive learning for planners and consumers are endless, and I am very excited about being part of this new frontier in financial services education.

Andrew Black is general manager of St George Margin Lending.