Borrowing to invest is for the rich, say advisors

Borrowing to invest is for the rich, say advisors

Borrowing to invest is for the rich, say advisors

Jackson also believes retail clients generally invest in what stocks or securities they think are ‘no brainers’ or ‘absolute wins.’ “A lot of stock can go down 10 to 15 per cent in a blink of an eye,” he says.

Jackson believes only high, net-worth clients should take a chance borrowing to invest, not only because they have the capital to do so, but because they have the sophistication and knowledge of the marketplace. “They get it,” he says.

Swanson, agrees, adding that the majority of investors are in no position financially to do so. “People can borrow enough to get into a mortgage, but the majority of people I work with age-wise, and the majority of younger people, I know, wouldn’t qualify for that kind of thing.”

IIROC’s guidance notice to advisors includes a checklist of issues to consider before making recommendations about borrowing to invest, and outlines the minimum controls dealers should have to identify and supervise strategies which include; the use of margin loans advanced by firms and loans from third parties perhaps affiliated with the dealer.

“IIROC’s guidance when borrowing-to-invest strategies highlights best practices for registered representatives and firms to help them comply with their suitability and supervision obligations,” said IIROC President and CEO Susan Wolburgh Jenah in a release.


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  • Leo Durand 2014-02-20 2:21:05 PM
    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
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  • Bob T 2014-02-20 3:23:06 PM
    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.
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  • Bob White, CLU 2014-02-20 7:31:15 PM
    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.


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