Borrowing to invest for retail clients is a conclusive ‘no, no’ for some advisors.
In response to IIROC’s announcement Wednesday – warning advisors and dealers to ensure their clients are fully aware of the implications from borrowing money to pay for stocks and other securities – advisors feel the risks outweigh the profit.
“I think it is a bad idea at the retail level,” says Reg Jackson of the JMRD Wealth Management Team. “I don’t think the risks are adequately understood. When you’re investing in the stock market where nothing is guaranteed your capital is at risk.”
Doug Swanson, an advisor and owner of the Douglas E. Swanson Assurance Agency, agrees with Jackson, though there was a situation where one of his clients did so, ignoring his advice. Swanson says the client attended a seminar and decided to pursue the loan endeavour on the advice of another advisor.
"If I was not prepared to do it, they would have considered moving their existing investments. I did not provide the loan, but I did provide the investment and the reporting format," said Swanson. "Their circumstance changed dramatically and there was insufficient time to come out with a positive experience or in dollars. I nursed the client back to financial health."
According to Swanson, both clients are now 'gold' clients, follow his advice, and have since provided him with numerous referrals.
Both Swanson and Jackson feel the volatility of the stock market is the primary reason retail investors should steer clear of this practice, and advisors should not encourage them to do so. Market disruptions and unexpected pull backs can come out of left field, says Jackson, leaving a client at a standstill.
“Losing capital is one thing, but losing capital and then being forced to also make payments on money that is borrowed … you can get into a very difficult position in real hurry,” he says. (continued.)