Advisers ignoring gearing reviews: Bendigo

14-Mar-2014

By Krystine Lumanta

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Some advisers are approaching gearing with a set-and-forget attitude, placing clients in a high-risk situation for a margin call, according to a technical executive.

While the majority of financial advisers were sensible when it came to gearing, there were still many inaccurate, inbuilt assumptions, particularly around how margin lending worked, Bendigo and Adelaide Bank head of technical and research Julie McKay said yesterday.

“The one thing that we keep on having to come back to with advisers is that with any gearing strategy what they cannot do is just leave it to sit there,” McKay told financialobserver.

“Leaving it for three years doesn’t work because any gearing strategy has to firstly be based on clients’ goals, which change, but also it must be based on a view of the market relative to interest rates and obviously if you don't think the market’s going up, you shouldn’t invest at all, let alone gear.

“Let’s say your view of the market hasn’t changed, if the market goes up, your gearing ratio goes down, so all of a sudden you’re misaligned from your strategy and the reverse is true when the market is going down, all of a sudden your gearing goes from 50 per cent to 60 per cent. If you do nothing about it, your strategy eventually starts to look like a very high risk strategy, geared at 80 per cent, and puts you in the frontline for a margin call.”

As a matter of course, advisers made sure client portfolios were diversified and low geared, however, they were not thinking about or preparing their clients for regular reviews, she said.

“At the end of the day, the client has to be prepared with the idea that there might come a point where if things start to go a bit pear-shaped, they have to cut their losses and they might have to sell some of the portfolio,” she said.

Furthermore, some advisers were still approaching margin lending like a home loan, she said.

“Margin loans are fundamentally different because of the underlying assets as they’re liquid and you can sell a couple of shares; you can’t sell a couple of bricks in a house,” she said.

“The actual payments are also significantly smaller than other principal interest-style loans.

“This is a fundamental education piece that advisers aren’t getting because they’re thinking in terms of traditional home loans, so ‘what’s the dollar amount I can borrow’, but by and large the starting point for a margin loan has to be the gearing level, not the amount.”

According to the Investment Trends “September 2013 Margin Lending Investor Report”, released last month, the number of investors planning to establish their first margin lending loan within the next 12 months had jumped by 37 per cent to 78,000 investors compared to 57,000 in 2012.

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