Making margin lending accessible

While margin lending is not a difficult investment concept, it can be managed poorly and even omitted from investment strategies because planners are not confident in recommending it.

In addition, with gearing in super now an option, planners who have the confidence to talk to their clients about margin lending will ensure these clients and their own practices are not left behind.

As the financial advice industry grows and investors look for new and different wealth creation options, good margin lending education for planners is essential.

The right kind of education

This education must be more than the how to’s of describing margin lending and the actual process of taking out a loan.

Such education should include developing know-how to create risk minimisation strategies, and what specific role margin lending can play in a client’s long-term investment strategy.

Planners also need to reflect on their own advice style, type of business and how they service their clients.

A better educated planner armed with the right knowledge who can effectively communicate to their clients will be better prepared for interest rate movements, market movements and margin calls.

For example, the financial and emotional response to a margin call needs to be talked through. The right mindset is as important as the right gearing level.

If planners want to improve their knowledge of gearing, it is available via formal channels with the ability to earn continuing professional development points.

This gives them the confidence that it is tried and tested and satisfies accepted industry standards.

Our support for education is by no means lip service; we encourage participation in formal gearing education as a pre-requisite for planners to write margin loans with us.

On the flipside, planners with a limited knowledge of margin lending can be unfamiliar with the concepts of loan to value ratio, how to determine maximum loan size, and how falls in the portfolio may trigger a margin call, for example.

When advice is given and client decisions are made in the dark on these matters, there is a higher risk of a poor investment outcome.

Also, when planners are first exposed to margin lending many are challenged by the relationship between the ‘buffer amount’ and current portfolio value, the possible reasons for using margin loans and the possible outcomes.

This is another reason why education is so important for planners keen to offer clients this wealth creation option with confidence.

On the practical side, the following are some key points for planners to discuss with clients to ensure clients know enough about margin lending to include it in their strategy:

1. Why gearing is a good form of debt, that is, the tax benefits;

2. Similarities between borrowing to invest in the share market versus property investment;

3. Comparing the benefits (leverage position, taxation benefits, protection strategies) and risks of gearing (effects of falling market on clients’ security value);

4. Different strategies for specific clients and life stages;

5. Margin calls, why they happen, how to minimise their impact, and how to help clients understand the benefit of margin calls;

6. Case studies that relate to their client’s position and financial goals;

7. Comparisons of other forms of lending, that is, home loan, credit card, personal loan and so on.

Additionally, if planners take the time to run some mock margin loans for their clients, they can demonstrate the impact of a downward market shift and how a margin call would actually work.

This means investors are prepared, both financially and emotionally.

Margin lending growth

As a feature of both retirement and general wealth creation investment strategies, margin lending is set for strong growth.

The latest Investment Trends Survey showed that over 60 per cent of margin loans came through a planner, plus more and more direct share investors were taking out margin loans. In fact, one in five new direct shares accounts are for a margin loan.

A specific new area of growth is the opportunity for gearing in superannuation, which offers investors another way to improve their retirement income. With the knowledge and understanding that comes from margin lending education, planners and their clients will be able to consider this opportunity.

Previously, for existing DIY or self-managed superannuation funds, the technical investment type by which you could gear in super was via instalment warrants.

I expect many planners would already include these instalment warrants in their clients’ strategies and so would understand how they work.

Recently passed legislation has removed the uncertainty over whether instalment warrants breached the law by allowing super funds to borrow.

More importantly, these new changes now allow gearing in super through public offer superannuation funds and increasing the number of investors able to benefit — margin lending presents a solution to allow this gearing to take place.

Of course, advisers today are more likely to recommend margin lending to clients with high risk profiles, and when they discuss gearing in superannuation they need to be mindful of the gearing for clients with lower or risk averse profiles.

So take the time to learn more about margin lending and see how it can benefit your clients and your business, plus talk to your clients’ superannuation fund administrators about the practical processes they are setting up to facilitate gearing.

It is through your education that your clients will avoid both missing out on a new and exciting way of increasing their retirement income and the risk of making poor financial decisions.

Paul Lewis is the acting general manager of St George MarginLending .