Setting goals

Gearing for long-term goals

03 June 2019

Money & Life team

Money & Life contributors draw on their diverse range of experience to present you with insights and guidance that will help you manage your financial wellbeing, achieve your lifestyle goals and plan for your financial future.

Gearing strategies have their pros and cons, but they remain a genuine strategy for wealth creation, for the right type of client. Is it time to reconsider gearing?

The days when capital city property was a sure-fire path to building wealth may be well and truly over.

With the property market still looking for a bottom, financial planners are increasingly searching for alternative strategies to help clients build their wealth.

One solution that may be about to have its day in the sun again is margin lending.

Many planners burnt by client margin calls when portfolio values went south during the GFC remain reluctant to dip their toes – and those of their clients – back into those waters.

That sense of reluctance can result in a missed opportunity for some clients, claims Leveraged national distribution manager, Teresa Dalla-Fontana.

“Regulatory change has altered the way margin lending is used. In addition, some of the features of margin loans have also evolved making them different to the products of the past. While margin lending is not for everybody, it definitely can be a bona fide strategy for wealth creation.”

Changing times? Advice needs to change

Traditionally, the catalyst for implementing a gearing strategy was rising sharemarket sentiment. Current caution around the market means planners are unlikely to be considering gearing.

“Is there ever a ‘right’ time to consider gearing? It should really be about the appropriateness of the strategy for the client,” says Dalla-Fontana.

Given the weak returns available in most investment markets, Dalla-Fontana believes planners must consider every appropriate strategy to make a client’s money work as hard as possible.

For example, gearing can be a useful strategy for younger clients finding it difficult to enter the property market or looking to finance their children’s future education.

A new study by consulting firm EY, Safe as Houses, found more than 60 per cent of Sydney residents would have been financially better off if between 1992-2017 they had opted to rent and invested into the ASX200 using a loan strategy geared at 50 per cent.

The report has significant implications for Australians looking to build wealth, according to EY chief economist, Jo Masters.

“We would caution against just assuming that home ownership is the only way to create future wealth. The conversation needs to be broader and a consideration of alternatives needs to be a part of the conversation.”

For many planners, the study challenges existing assumptions that home ownership – particularly in certain areas – is the best way to create wealth. It also provides a useful backdrop for client discussions around advice strategies, like margin lending, which allow clients to build wealth without focusing on overpriced assets like residential property.

As Masters noted when releasing the study findings: “With today’s property prices, you could be better off renting somewhere affordable and investing the cash you’ve saved.”

Revolution in the  financial landscape

The current transformation of the banking industry means planners also need to reassess the suitability of traditional strategies, like using a client’s home loan redraw facility to fund other investments.

“Regulatory uncertainty and increased difficulty in obtaining credit means many planners are finding their clients’ banks are no longer willing to provide an interest-only loan, or rollover an existing loan facility. The banks have changed, so advice needs to change and adapt as well,” says Dalla-Fontana.

“Planners need to keep in mind that margin loans may be an ideal strategy to consider for some clients.”

In today’s compliance-focused advice environment, planners also need to reassess the gearing solutions they currently use, as they may be easy to implement, but lack the regular monitoring offered by margin loan products.

“Are you genuinely offering holistically appropriate advice if you put the client into a set-and-forget strategy, like home loan-financed gearing? Do you have the sophisticated systems that constantly monitor portfolios to allow reassessment of the strategy?” says Dalla-Fontana.

“Ask yourself if you can justify your fee using a home loan versus using a margin loan that encourages regular interaction with clients. Which is the more compelling tool?”

Missing out on client demand?

Sticking with an out-dated attitude to gearing may also mean missing out on solid client interest.

The Investment Trends 2018 Borrowing to Invest Report found strong interest in using gearing to invest, particularly among millennial online investors.

“Nationwide, an estimated 86,000 online investors are gearing their investment portfolio through a variety of methods, most commonly with margin lending products, line of credit secured against their home equity and home loan redraw facilities,” says Investment Trends analyst, John Carver.

“These borrowers firmly believe in gearing’s effectiveness as a wealth creation strategy and on a net-basis, agree that others their age should also use gearing to achieve their goals.”

According to the Investment Trends report, there is significant potential for further growth in the number of investors willing to utilise portfolio gearing, with its modelling indicating 81,000 intended to begin using gearing in the next 12 months and a further 230,000 could be encouraged to do so.

Use of gearing is highest in the late accumulation stage, with 16 per cent of online investors aged 35-50 and 19 per cent of those aged 50-64 using gearing, compared with only 5 per cent of millennials. There is, however, substantial interest among millennials, with 52 per cent saying they would like to, or can be encouraged to begin borrowing to invest.

Different goals, different attractions

Despite the latent client interest, many financial planners remain suspicious of margin lending’s inherent risks in the wake of the Hayne Royal Commission’s focus on inappropriate lending.

“We often hear it’s too difficult for compliance reasons to use margin lending, however, we support planners by providing tools for cashflow analysis, illustrations of geared vs non-geared scenarios, SoA wording and more to aid their compliance,” says Dalla-Fontana.

It is also important for planners to recognise that margin lending is not a one-size-fits-all strategy, with different clients wanting different paybacks.

“Millennial borrowers recognise the benefits of leverage-funded investing … to facilitate greater investment, given their cash flow and ability to achieve increased diversification in their portfolios,” says Carver.

“These benefits are cited more often than older borrowers, who are more likely to cite negative gearing as a key advantage.”

The variation highlights the different ways margin loans can be utilised.

“Investors tend to associate gearing with negative gearing. However, gearing allows investors to increase their share in potential investment income and capital growth. Therefore, gearing can be neutral, positive or negative,” explains Dalla-Fontana.

Long-term goals

The Investment Trends study also found clients using margin loans tended to be in it for the long haul, with 62 per cent saying they intended to continue using their loan for five or more years, while a further 18 per cent said they planned to continue until they reached a specific wealth or savings target.

“Margin lending investors predominantly see borrowings as a long-term investing tool, not for short-term gains. This is also reflected in their level of gearing, with an average margin loan LVR of 42 per cent,” says Carver.

Gearing an investment is not only about margin loans. There are other options available to planners and their clients that remove some of the issues – like margin calls – associated with traditional margin loan facilities. Financial planners can also consider using internally geared managed funds and ETFs as a simple way to utilise the advantages of geared investments and improve portfolio diversification, without some of the client risks normally linked with margin lending.

Risks remain, but products have evolved

Despite its usefulness as an investment tool, margin lending still has significant downside risks.

“While it can magnify gains, it can also do so for losses. When considering margin calls, never say never. While measures can be taken to minimise risk, we must never lose sight of the fact that we could have a catastrophic event that triggers one,” concedes Dalla-Fontana.

“Many financial planners remain worried about recommending margin loans, but it’s important for them to recognise that the market has evolved and margin loan products have evolved as well.”

Conservatively geared, well-diversified portfolios, are less likely to trigger a margin call.

In fact, licensees generally do not allow gearing strategy recommendations with an LVR of more than 50 per cent.

For financial planners, an important step in assessing a client’s suitability for a margin loan strategy is to consider their cashflow and budget position.

For example, to further reduce risk, Leverage offers a product that encourages diversification by limiting the portfolio concentration of investment in some direct equities to 20 per cent of the total portfolio. At the same time, it is flexible and allows 100 per cent of the portfolio to be invested in certain managed funds, ETFs and Exchange Traded Government Bonds.


8 pros and cons of margin loans


1. Access to funds to take advantage of investment opportunities.

2. Potential to increase investment returns.

3. Ability to diversify portfolios.

4. Allows greater market exposure and flexibility.

5. Additional liquidity without selling assets.

6. Ability to borrow without property equity.

7. Potential tax deduction for loan interest.

8. Ability to prepay interest and bring-forward a deductible expense.



1. Potential to magnify investment losses.

2. Possibility of increasing the debt amount.

3. Risk of margin calls.

4. Unwanted crystallisation of losses due to forced asset sales.

5. Risk of LVR changes imposed.

6. Interest rate risk.

7. Removal of chosen shares and managed funds from approved list.

8. Unsuitable for investors with short investment horizons.


Margin loans: Want to stay out of trouble?

In the wake of the Royal Commission, many planners take fright at the idea of using a non-vanilla strategy, viewing margin loans as a potential compliance minefield. But there are ways of staying out of trouble.

The Australian Financial Complaints Authority has taken over responsibility for margin loan disputes and initially is relying on guidelines established by its predecessor, the Financial Ombudsman Service (FOS).

According to FOS, a margin loan recommendation may not be considered reasonable for a client if the:

* investor had little or no ability to resource the loan facility, aside from investment proceeds;

* adviser’s recommendations could only be achieved through the use of gearing and were in conflict with the investor’s investment objectives and risk profile;

* loan was secured over an investor’s primary residence with few other liquid assets in the portfolio; and

* recommendation to enter into a gearing strategy was based on general or limited advice.