Teresa Dalla-Fontana, National Distribution Manager Leveraged, is a margin lending specialist with fifteen years’ experience supporting Financial Planners and Stockbrokers use of gearing for their clients wealth creation strategies.
With the Federal Election out of the way, planners can now implement their clients’ investment strategies with more confidence. For the right type of client, gearing could be a sensible option to consider as one way to achieve their wealth creation goals.
With the prolonged uncertainty of the Federal Election campaign behind us, financial planners can look ahead with more confidence about the prospects for both the property and share markets.
In fact, some analysts are even predicting something of a market rebound following the return of Government.
Greater confidence and market certainty make it a good time to consider gearing strategies for suitable clients looking to build or diversify their wealth, explains Leveraged national distribution manager, Teresa Dalla-Fontana.
“While margin lending is not for everybody, it definitely can be a bona fide strategy for wealth creation and for the right clients, now may be a good time to consider it,” she says.
The certainty created by the election result has Goldman Sachs economists reportedly forecasting a “moderate positive shock to sentiment in the corporate sector”.1
With a margin loan in place, clients can access the necessary funds to take advantage of any investment opportunities that arise, while also enjoying a potential deduction for their loan interest.
A boost for the sharemarket?
An end to the previous caution around the sharemarket and property‑linked shares in particular due to the opposition’s proposed halving of the CGT discount, makes it a sensible time to reconsider margin lending.
“There has been a lot of noise that needed to be ignored,” says Dalla-Fontana.
“As an advice strategy, if you are looking to reduce non-deductible debt and increase deductible debt to achieve a client’s goals, then gearing could be a very suitable tool.”
Using a margin loan, clients can increase their exposure to a range of asset classes and diversify their portfolio, which makes their money work harder whether they are building wealth or looking to fund their children’s’ education.
“Planners should always focus on the most appropriate strategy required to ensure the success of the client’s financial goal,” she notes.
With the Investment Trends 2018 Borrowing to Invest Report finding strong interest in using gearing, a more stable post-election environment could find clients more open to discussions about the strategy.
For older clients, the uncertainty of constant political tinkering around super rules could make gearing strategies more attractive, as they allow clients to keep a component of their savings and investments outside the super system and fully accessible at any time.
“Planners need to keep in mind that margin loans may be an ideal strategy to consider for some clients,” says Dalla-Fontana.
Path to portfolio diversification
The Investment Trends2 report found millennial borrowers in particular recognise the benefits of leverage-funded investing as a way of building and diversifying their portfolio.
With more investment certainty, some clients will be open to the idea of borrowing to invest for greater sharemarket exposure. Using Leveraged’s Instalment Plus feature, they can build a share portfolio starting with as little as $1,000 and a minimum loan of only $2,000.
“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.
With changes in the banking industry making it tricky to use traditional strategies like using a client’s home loan redraw facility to fund investing, a positively geared margin loan can be a useful alternative.
Tools to reduce risk
The ongoing development of margin loan products means risk is reduced in other ways. “Regulatory change has altered the way margin lending is used and the features of margin loans have also evolved, making them different to the products of the past,” explains Dalla-Fontana.
To diminish the risks of some gearing strategies, Leveraged offers a product that limits the portfolio concentration of a single share to 20% and encourages diversified portfolios by lending on over 1,200 managed funds, ETFs and ASX shares.
Leveraged monitors all loan balances daily. With their IFM facility, and if the gearing ratio reaches 85%, clients make a set monthly loan repayment in the case of a margin call.
“With a 1% repayment there is no ambiguity about how much the client has to pay. If they have a $100,000 loan for example, the repayment is $1,000 a month.”
Given the availability of these Leveraged loan management tools, now may be an excellent time for advisers to revisit margin loans with appropriate clients.
1 Australian Financial Review, Monday 21 May 2019 2 Investment Trends 2018 Borrowing to Invest Report
Issued by Leveraged Equities Limited (ABN 26 051 629 282 AFSL 360118) as Lender and as a subsidiary of Bendigo and Adelaide Bank Limited (ABN 11 068 049 178 AFSL 237879). This information is correct as at 24 May 2019 and is for general information purposes only. It is intended for AFS Licence Holders (or authorised representatives of AFS Licence Holders) only. It is not to be distributed or provided to any other person.
Subscribe for updates
Join 12,000+ of your peers! Get the latest strategy and practice management insights delivered straight to your inbox.