Risk for planner and clients with gearing

Financial planners face a paradox with gearing as using it to boost a client’s overall returns increases risk.

A planners role is to manage risk, not increase it, says Paul Resnik, speaking at a gearing conference in Melbourne organised by his consultancy firm.

There is also the risk to a planners business as if the client loses their house, due to using a home equity loan, the repercussions for the planner could be serious, especially if it ends up in court.

"Planners must ask the client if they can afford to lose their home if things go belly-up before encouraging them to take out a home equity loan," Resnik says.

"Whereas if things go wrong with a margin lending product, they lose the shares."

However, the greater flexibility of repayments, lower interest rates and no margin call risk makes home equity loans popular with clients and judging audience reaction at the conference, popular with planners.

The growth of gearing in Australia was illustrated by the continued growth in the numbers of investors and the amount of funds allocated to margin debt.

At the end of March this year, there was $7.5 billion of margin debt in Australia generated by almost 90,000 clients.

The average loan size is now $77,000, which is up 3.7 per cent on the previous September, 2000 quarter.