Monday
Apr142008
Margin Lending – What is Your Exposure?
By Jason Fittler
Do you have a margin loan? Have you heard of Tricom, OPES Prime or Chimaera Capital Ltd? Me neither. But now they are becoming house hold names, for all the wrong reasons. These are stock broking / margin loan companies who have had been in the media with regards to concerns over there ability to keep their doors open. With the risk that there clients may lose the money which they have invested with them.
It is one thing to invest in an underperforming company it is another one to lose money because you chose the wrong stock broking firm.
It is one thing to invest in an underperforming company it is another one to lose money because you chose the wrong stock broking firm.
The purpose of the article is to do two things;
1. Make you take a closer look at who is looking after your money and
2. Have a think about how you have your lending structured.
First, we all speak about investment risk… that is the risk that one of your investments may under perform. To reduce this risk we generally diversify our portfolio. However, this is not practical when choosing a financial adviser. As such you need to make sure that you make the right decision from the start. I recommend that it is better to be a big client of one adviser then a small client of many. Why? As a big client you will get better service, better advice and better results.
You also want to make sure that your adviser has all of the right qualifications and has the backing and support of a well know dealer group. Before signing make sure that you read all documents. A good adviser will disclose all information up front as they have nothing to hide. Keep in mind the general rule, if the deal seems too good to be true it most likely is.
Second, we are heading into time of higher interest rates and lower returns from the market. As such you need to start think about how much gearing you have and how this impacts on the over all return of your portfolio. I do not recommend getting rid of all of your borrowings but I strong recommend that if you are highly geared, that is above 50% of what you have invested comes from borrowed money, I would look to reduce this down to around 30%. Also take a look at who is your margin lender and make sure that the shares are held in your name and not in the name of a custodial trustee.
A custodial trustee can use these shares to secure borrowings, this is what has happened in the OPES Prime case, in this situation your share can be sold to pay out the custodial trustees loan leaving you to try and recover your funds from the custodial trustee. This is a structure you should never have.
If you would like us to review your situation give us a call on 07 4771 4577.
1. Make you take a closer look at who is looking after your money and
2. Have a think about how you have your lending structured.
First, we all speak about investment risk… that is the risk that one of your investments may under perform. To reduce this risk we generally diversify our portfolio. However, this is not practical when choosing a financial adviser. As such you need to make sure that you make the right decision from the start. I recommend that it is better to be a big client of one adviser then a small client of many. Why? As a big client you will get better service, better advice and better results.
You also want to make sure that your adviser has all of the right qualifications and has the backing and support of a well know dealer group. Before signing make sure that you read all documents. A good adviser will disclose all information up front as they have nothing to hide. Keep in mind the general rule, if the deal seems too good to be true it most likely is.
Second, we are heading into time of higher interest rates and lower returns from the market. As such you need to start think about how much gearing you have and how this impacts on the over all return of your portfolio. I do not recommend getting rid of all of your borrowings but I strong recommend that if you are highly geared, that is above 50% of what you have invested comes from borrowed money, I would look to reduce this down to around 30%. Also take a look at who is your margin lender and make sure that the shares are held in your name and not in the name of a custodial trustee.
A custodial trustee can use these shares to secure borrowings, this is what has happened in the OPES Prime case, in this situation your share can be sold to pay out the custodial trustees loan leaving you to try and recover your funds from the custodial trustee. This is a structure you should never have.
If you would like us to review your situation give us a call on 07 4771 4577.
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