Evalesco's Jeff Thurecht

Advisers are taking a more favourable view of margin lending than they have in recent years according to recent data from Investment Trends, but that hasn’t translated into usage as few are still actually recommending the practice to their clients.

The limited suitability of margin loans for a broader client base and the lure of low residential loan interest rates are among the reasons researchers and advisers who spoke with Professional Planner suggest margin loans might be getting left on the shelf.

According to the 2019 Margin Lending Adviser Report, 89 per cent of advisers believe their clients can benefit from the use of borrowings to increase investment returns (up from 82 per cent), while 87 per cent of stockbrokers feel the same (up from 72 per cent).

But that doesn’t mean they’re recommending clients employ the strategy, which – if the loan to value ratio drops far enough – can mean the client needs to contribute additional capital or sell off a part of the investment in what’s known as a ‘margin call’.

Despite the positive trend in sentiment, only 21 per cent of financial planners say they currently recommend margin lending to their clients. The report calls the retention of margin lending users a “growing issue”.

Investment Trends analyst Calvin Yap says advisers are quite selective about recommending the practice these days.

“While advisers’ views on margin lending are improving, they remain prudent, only using it for select clients,” Yap says.

According to Yaps’ colleague and fellow analyst John Carver, the reticence of advisers to recommend margin lending has a lot to do with the current outlook for domestic equities. On average, advisers expect the All Ords’ index to rise less than 2 per cent in the year ahead after expecting between 4 and 6 per cent last year.

“Advisers do not expect the local equities market to repeat its strong 2019 performance,” Carver says.

Miriam Herold, Head of Research at licensee Centrepoint Alliance, observes that most advisers are reluctant to allocate extra investment into a market that is viewed as fully priced.

“Equity markets are trading on very stretched valuations following the stellar returns in 2019, making addition allocation of capital to equities very difficult to justify, let alone introducing additional leverage,” Herold says.

The low rate environment also plays a part in detracting advisers – and the wider community – away from gearing to invest. With residential home loan rates at 3 and 4 per cent, it’s difficult to justify margin loan rates that float around 5 and 6 per cent. “Why not use your house mortgage?” says Mark Tindale, a senior financial planner at Ord Minnett.

Jeff Thurecht, founder and director at advice firm Evalesco, says he’s reluctant to use margin lending and doesn’t see the need for most clients. Like Tindale, he reckons that if drawing down on the mortgage to invest is an option, it’s probably the better one right now.

“We would prefer to use residential security backed loans for those clients where gearing into investments makes sense because the rates are lower,” Thurecht explains. “This has multiple benefits including cashflow savings, creating a lower hurdle rate for the investment and an avoidance of the inherent challenges of margin calls – which is generally supportive of clients best interests.”

Thurecht touches on a salient point; in many scenarios best interest duty precludes the recommendation of margin lending. Even if the ongoing income and risk appetite parameters are met, leading a client into a margin call is something most advisers would take pains to avoid – not only from a client perspective, but also from a regulatory standpoint.

“The spotlight of regulators, politicians and the media is still firmly on financial advisers following the Royal Commission and the introduction of the FAESA Code of Ethics,” says Centrepoint’s Herold. “While margin loan products may be suitable for a small number of clients as a result of their individual circumstances, advisers are acting with caution to avoid breaching their best interest duty.”

The report suggests advisers and stockbrokers would be more inclined to recommend gearing to invest if there were better products that supported the strategy. Currently a quarter of stockbrokers and 43 per cent of advisers have used margin lending in the past but no longer do.

“Many advisers are open to re-engaging with margin lending, but improved product features are important to convert interest into action,” Carver says.

Despite the positive trend in sentiment, only 21 per cent of financial planners say they currently recommend margin lending to their clients. The report calls the retention of margin lending users a “growing issue”.

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning. Contact at [email protected]xusfinancial.com.au
3 comments on “Advisers still shy on margin lending”
  1. Avatar Philip Carman

    Agree with Martin, but add that if someone wants to use leverage with shares, they SHOULD be prepared to put their home at risk (as well as get the reduced interest rate) as a test for their understanding and actual willingness to use the leverage If they don’t yet have a home that’s unencumbered (sufficiently) then they should not be doing leveraged equities. Advisers minimise the sense of risk to clients by suggesting that the only call is against the shares, but we all know that the client is taking on ALL the risks of downside action…

  2. Avatar Philip Carman

    Agree 100% with Marin’s comment (above) but would add that no one should advise using Margin Loans for leverage, because the real test is whethher the investor has a proper understanding of risk and if unwilling to put their real estate up as collateral they probably don’t. And if they don’t have unencumbered real estate to use, then they’re not ready to take the next step of levereaged equities…
    One of the problems with advisers recommending Margin Loans is that they imply that the risks are reduced because the only “call” is against the shares, but that creates a false sense of security by removing the client from any real sense of risk to themselves – when the risk is ALL theirs, always

  3. Avatar Martin Le Tessier

    There is a big difference between being pro gearing and pro margin lending. I think gearing is a valid form of long term investig but cannot see any value in any of the margin loan facilities on offer. The interest rates for a start are completely uncompetitive compared to what borrowers can achieve using their properties as security.

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