Advisers Still Recognize the Benefits of Gearing

4 February 2024

Is Geared Share Investing Picking Up?

Following the GFC, many advisers held back on giving gearing advice, with widely publicized failures of leveraged investors and products. However, in recent times, clients themselves are increasingly prompting their advisers to use gearing products. According to Anglicare Australia’s 2023 report, tax concessions are contributing to the popularity of gearing, particularly amongst top tax-bracket earners. Bracket creep, with the top rate threshold of $180,000 not having changed since 2008, may be contributing to this.

Adviser Opinion on Gearing

Recent research by Investment Trends based on 766 financial planners and 223 stockbrokers revealed that 73% of stockbrokers and 83% of financial planners believe gearing could play a critical role in their clients’ portfolios. Gearing was believed most appropriate for clients where:

  • They have $1 million or more in investable assets.
  • Household income is above $200,000.
  • They are in an accumulation phase and between the ages of 35 and 49.

According to John Carver, Investment Trends analyst, gearing can be suitable for a range of different clients. It is not just for young people who want to increase gross asset exposure, it is also suitable for clients who already hold a lot of assets and can absorb risk.

Margin Lending in Advice: A Growing Issue

Despite the positive perception towards gearing, only 21% of financial planners and 60% of stockbrokers currently recommend products like margin lending. Only one in four stockbrokers and around half of planners (43%) used margin lending in the past but don’t do so currently.

Margin lending remains the most popular option for gearing, but there is also growing popularity with non-margin lending products like home loan redraw facilities, internally geared funds, and lines of credit.

Because of the popularity of margin lending, 71% of stockbrokers and 78% of planners state that they could start using this credit product again if they are encouraged to do so with improved product features. Here are some of their expectations:

  • Launch of loan products that avoid margin calls.
  • More choices to protect the client’s initial capital.
  • High levels of service and support, particularly BDM support.

De-risking Gearing

When gearing into share investments, non-margin products, such as a home loan debt-recycling, can serve to decrease risk.

Geared investment vehicles should be well diversified and highly liquid to lower risk. Broad-based ETFs and some managed funds fit this bill well. Internally geared funds, such as ASX GEAR over the ASX 200 and SSO over the US S&P500, generally use 1.5 – 3 x gearing multiples at relatively low cost.

Final Words

With gearing and margin lending picking pace, qualified and skillful paraplanners are needed to support the sophisticated strategies with financial planners.

At Mutual Paraplanning Services, we work with financial planners closely on geared advice, especially in modelling and compliance checks. We specialise in debt recycling, margin lending, and SMSF LRBA. Contact us today to find out how we can support your business.

Categorized Paraplanning