Margin lending profits inflated: Walker
Profits for margin lending providers are artificially high, according to an industry figure.
Profits for margin lending providers are artificially high, according to an industry figure.
Mercer Fund Manager Services principal Geoff Walker says if the loss experience of players in the gearing market is substantial enough to justify the current rates, then the players should let the market know.
He says the gearing market shares similar characteristics to the home loan market, and therefore prices should reflect this. Furthermore, the market is ripe, he says, for a discount lender to force profit margins down as has happened in the home loan market.
However, Deutsche Funds Management director Sarah Brennan argues Walker is "not comparing apples with apples" by likening the two mar-kets. She argues that lending in shares contains a greater risk.
"Share values go up and down on a daily basis, and you don't have this volatility with the housing market," she says.
"If a client doesn't meet a margin call and you have to sell the shares, there is not always a market to sell them at sufficient re-covery costs," she says.
Brennan also says that the margin lending market does not have mort-gage insurance like the home loan market.
ANZ Margin Lending marketing manager Sarah Frearson backs Brennan's argument. She says the two markets are distinct, with margin lenders incurring huge administrative costs in comparison to the home loan market. She also argues that, unlike most margin lenders, home lend-ers slug clients with establishment and ongoing fees.
However, while Walker says he applauds the gearing market for their high level of customer service, he argues the extra administration should be reducing risk. Furthermore, he says the market is not lend-ing against high risk shares.
"While I accept that there is the potential for volatility in a sharemarket, gearing managers lend often lend against managed funds, which generally carry less risk than direct shares," he says.
Recommended for you
Money Management examines the share price of financial advice licensees over one year to 31 March, with M&A actions in the final quarter having a positive effect for two licensees.
A $3.5 million settlement for victims of Melissa Caddick has been approved by the Federal Court following an initial agreement last December.
The Reserve Bank of Australia has delivered its first rate decision since the introduction of a new board structure last month.
Digital advice provider Otivo has launched an interactive tool, powered by artificial intelligence and Otivo’s own advice engine, to help answer client questions.