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Wealth Professional | 20 Feb 2014, 11:38 AM Agree 0
Acquiring more debt to invest is not a wise recommendation for your retail clients, believe some advisors.
  • Leo Durand | 20 Feb 2014, 02:21 PM Agree 0
    I am amazed that advisors are allowed by their sponsoring firms to introduce this advanced investment strategy. It may be only my opinion that the level of risk to the client and the advisor is really not understood by either. Years ago I managed to figure out the saying “Sounds too good to be true” means in almost every case it is! Unfortunately for some they’re not willing to listen, just have to learn or experience the impact themselves
  • Bob T | 20 Feb 2014, 03:23 PM Agree 0
    I agree with Leo. I have had to rescue too many people who have come to me from other (usually MFDA) advisors with huge loans and huge losses. In my opinion every one of them should have sued the advisor who recommended borrowing to invest.
  • Bob White, CLU | 20 Feb 2014, 07:31 PM Agree 0
    Leveraging is not bad, we do it every day when we buy a home with a mortgage or a car with a loan.

    What is bad from the investment perspective is how it is positioned. I have seen the good the bad and the ugly when it comes to leverage investment loans.

    First off should be the why and what. What is the purpose of the loan and why does it work. It has to be part of a financial planning, Estate planning, tax planning process and it has to be low/medium risk managed money, fee for service (tax deductions) and long term. The client needs to be in a higher tax bracket, and has the higher risk tolerance. And the Goal should be to be as tax efficient as possible using Corporate class structures, so not to be triggering taxable events when changes need to be made.

    Recently I took over my brother in laws leverage account. It was nasty to say the least, seg funds that paid the highest DCS fees and compensation to the advisor, and in 7 years is underwater. Not managed, it was just a sales job by the salesman who holds himself out as a financial advisor.

    My own personal leverage was done Sept 2008 and then the market took an additional correction a 20% drop, but, at this point in time I have made 79% growth in 5 1/2 years. The intent was to achieve 1% over the gross cost of borrowing. With the cost of borrowing is deductible and simple interest.
    So there is 30% in tax savings, which with out question forms part of the overall return, and the fees of 1% are also deductible for another .3% benefit. Add up all the benefits and the realized gain is significant.

    You need to have a sensativity spread sheet to be able to illustrate to the client what happens with drop on investment return, increase in interest charges and changes in tax rates. If this is not done, then there should be no leveraging, it is just a sale ploy to sell a bigger investment. An advisor would do due diligence and make sure it was crystal clear as to the pros and cons.

    If there is no planning, then there should be no leveraging.

    It is not rocket science, If the advisor does not know the math, the tax laws, the investment risks, the costs associated with the investments, the historical data on the investments in detail, the Standard Deviation, the up and down side of the markets, the tax consequences of the investments, for buy selling and switching, then they should never even consider putting the client at the risk of the crap shoot.

    To blanketly state leverage is bad, is because too many have harmed too many people through no planning, no real advice and a lot of sales tactics, and this has made it difficult for planners to use leverage to the benefit of those who can benefit by the planning, because now the regulators deem that all leverage is bad.

    Just my thoughts.


  • Bob T | 21 Feb 2014, 10:56 AM Agree 0
    To Bob White

    I suspect you are one of the very few who could use this appropriately. I have yet to see a leveraged account handled correctly. Instead most of the ones I have seen are similar to your brother-in-laws.

    The ones I have seen have never been designed for the investor but rather for the advisor. DSC funds, no management, high MER's and often by the time I see them the advisor has left the business and left the carnage. In many cases it has been obvious to me that the only reason for the strategy was to allow the advisor to sell more funds.

    I am also disappointed at the fund companies and other providers who facilitate these programs. In discussions with their wholesalers they are often blatant about leverage being a way to increase sales.

    In a past life I worked for a trust company. In early 1987 a manager in Toronto was doing huge leveraged loans secured by mutual funds and we were all encouraged to look at this source of lending business. I was skeptical. Shortly after the 1987 crash the Toronto manager just seemed to disappear from the company directory.

    Cheers to you as well. As indicated if I saw a plan done by someone who put the kind of thought into it that you do I mifght actually get it but until then I will avoid any leverage like the plague.

  • Scott Neal | 21 Feb 2014, 11:03 AM Agree 0
    Bob - what a refreshing analysis. I say analysis because this is the first time I have seen somebody with like mind actually state some facts. Many have opinions about the use of leverage because of scary stories they have heard about.

    Simply put, leverage is a long-term strategy that must be considered only over a significant time frame. When we use leverage with our clients it is based on proven tax strategies that actually help clients pay off their non-deductible debt much faster that they would normally do.

    People are very comfortable borrowing for a car knowing that the instant they drive off the lot the car depreciates. How does that make sense?

    When you consider long-term interest rates should be closer to 5 or 6% and that in the higher tax rates as Bob has suggested the after tax cost of borrowing is slightly less than 3%, a carefully crafted portfolio that returns a modest return over the long run should be easily achievable.

    What Financial Coaching is about is managing behavior and not reacting to short-term adjustments. Crystallizing losses at the first sign of a downturn is a sure plan for losing. Leverage or no leverage.

    Thanks Bob,

  • Tejeda | 27 Feb 2014, 02:59 PM Agree 0
    Does your site have a contact page? I'm having problems locating it but, I'd like to send you an e-mail. I've got some ideas for your blog you might be interested in hearing. Either way, great website and I look forward to seeing it improve over time.
  • Wealth Professional Staff | 27 Feb 2014, 03:09 PM Agree 0
    Please see the contact tab at the top right-hand corner of your screen, beneath the WP banner. You can find editorial contacts there. Thank you. WP Staff
  • Scott Neal | 27 Feb 2014, 03:51 PM Agree 0
    Not sure if you were asking for my company website. If so, feel free to check out
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