Borrowing to invest is for the rich, say advisors

Acquiring more debt to invest is not a wise recommendation for your retail clients, believe some advisors.

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.)


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.