When sentiment in investment markets turns, it can turn quickly. And there’s plenty of historical evidence to suggest that it’s in the earliest stages of a turnaround that investors stand to make most money.
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If financial planners and their clients are not already prepared, it won’t be surprising if they miss the boat. Again. Even so, talking to clients about investing in equity markets can be a difficult conversation, let alone talking to clients about gearing. Figures published by the Reserve Bank of Australia (RBA) show that total margin loans had declined to about $15 billion by the end of December 2011, well below the $41.6 billion peak of December 2007.
Margin lenders are looking for ways to reignite planners’ and clients’ interest in borrowing money to invest in the sharemarket. They’re doing this by developing tools and services to support planners; and by developing new products that remove one of the things that frightens borrowers most about margin loans: margin calls.
Recent research by Investment Trends found a high level of interest among advisers for so-called “no-margin-call” products. Pete Steel, general manager of Core Equity Services, says there are basically two ways to create a product that eliminates a margin call.
“One is to secure some debts and investments against an asset that is not likely to be revalued very often, like a house,” he says.
“So one of the forms of a no-margin-call product is using home equity. “You can leverage the equity [in a home] without a margin call occurring.
“The second way – which is more towards the structured product route – is for the organisation providing the product to use derivatives or to look at the risk of a margin call occurring, and usually pricing in that risk and using derivatives to negate the need for that margin call.
“If the investment [falls] to a certain level, they can use a derivative that they’ve paid for to sell it out at no more loss. That implies cost, to do that upfront, to create that no-margin-call environment.”
