Have you lost money though a MARGIN LOAN?

Storm financial was a unique situation where they did a special deal with CBA - which broke the normal operation of margin loans.

It's not the lenders who are at fault usually (in Storm's case it possibly was) - it is the financial advisors who leverage people too highly. Of course many of these people who rely on advisors are not fully aware of the nature of the product - they simply trust their advisor to do the right thing, which is why they can have problems. This does not make the products or the lenders faulty.

Margin loans are a very useful tool when used correctly. People should not be utilising financial products that they don't understand.

Sim,

From the Australian Bankers' Association Code of Banking Practice:

"25.1 Before we offer or give you a credit facility (or increase an existing credit facility), we will exercise the care and skill of a diligent and prudent banker in selecting and applying our credit assessment methods and in forming our opinion about your ability to repay it. "

(yes, a margin loan is a line of credit)

In a system where banks pay incentives to financial advisers to sell margin loan products to consumers, it is not acceptable to also rely on the advice of the same financial adviser in forming an opinion about the ability of a customer to repay.

I suspect there are many cases where customers will be able to successfully demonstrate that such diligent and prudent care has not been taken.

Not only is it a line of credit, it is usually an "asset lend" - your ability to repay it is not the issue - it is your ability to maintain your LVR that is critical.

This is what makes margin loans so powerful.

Of course it is acceptable - indeed imperative that we rely on the advice of the advisor. That's kind of the point of them being an advisor. It is solely their responsibility to ensure that their client is able to safely and appropriately use the product they advise them to use, and more importantly, to continue to offer sound advice throughout the life of the products use.

The relationship between advisor and client should not cease at the time of the initial investment - that would make them nothing more than a sales person.

The question of commissions tainting advice is a completely separate issue - but still places the responsibility on the advisor.

As I mentioned - the "ability to repay" is not the issue with a margin loan ... that's not how they work. It is the ability to manage the asset which is critical ... and which was the problem in the Storm Financial case - the asset was NOT managed and was allowed to get into a negative equity situation.

There is a reason that margin lenders set relatively conservative LVRs on the stocks/funds they lend against. In the case that the market drops (and you can't meet your LVR obligations from external sources), they will sell down your holdings pre-emptively to specifically avoid the situation where you get into negative equity. This is mostly to protect themselves - but does also have the side effect of protecting the borrower.

I guess we are going to have to agree to disagree on this one! To my mind, the equivalent to what you are effectively saying is that when you sign up for a credit card, it is the responsibility of the commission sales guy who accosts you in the shopping mall to get you to sign up to ensure that you are able to repay the debt, rather than the bank who provides the card.

In your opinion, is a bank which relies on the advice of an adviser who earns commissions from selling the margin loan product, in forming an opinion as to the ability of a client to repay a loan doing enough to satisfy its obligations under the banking code of conduct?

I think the critical point here is the ability to meet LVR obligations from external sources and the fact that this is being assessed by parties (financial advisers) who have a vested interest in seeing the product sold. In other words, if you can't make a margin call and your holdings are sold down and you end crystallising a loss, the advice given to the bank as to your ability to repay that loss is tainted and in my opinion not sufficient to meet the banker's code of conduct. If I was a lawyer that would be the angle I would take in these sorts of cases, anyway.

You seem to be of the opinion that the advice of a financial advisor is not worth the paper it is written on and they are nothing more than glorified sales people.

This seems to warp your view on the subject.

I am working from the assumption that the advisor is giving you sound advice. If they aren't, that's a very different problem ... and once again, is the fault of the advisor and not the products they recommend.

You seem to be working on the assumption that margin calls must be met from external sources and that selling out of a falling market is a bad strategy ?

So if you have a margin portfolio worth $5m, you must somehow keep an additional few million dollars lying around in the case you get a margin call ?

That's not a particularly good use of capital in my opinion - and there's nothing wrong with deleveraging your portfolio to minimise losses rather than to hold onto something and keep pouring money into a portfolio which is going down in value.

If you are talking about $50K margin portfolios - fine, I'm sure you can find some money to put into that ... but try scaling that up to several million dollars. The strategy becomes unworkable then.

Buy and hold long term is a reasonable strategy - but if you add leverage to the mix, you need to take a much more active approach and work to protect your capital. This isn't like buying a home to live in - you can't apply the same rules and strategies as you would to buying a PPOR.

Sim

I am merely pointing out that in addition to the role they play in advising clients, the financial advisers often appear to be relied upon by the margin lender as a substitute for doing their own proper checks on client suitability for the margin loan products being sold.

When I borrow money from the bank to buy a house, the bank conducts thorough checks as to my ability to repay the loan should things go pear shaped. This kind of diligence does not seem to occur with margin loans, so the bank has no way of knowing if the client has access to external funds/assets to utilise if they can't meet a margin call or end up owing more than the value of the assets which are liquidated, in a worst-case scenario.

What we are really debating is whether the bank has a duty of care here, not just the adviser. I believe it does, you appear to disagree - that's fine. Let's see what the courts say.

(for the record, I do not have any of the views that you have attempted to express for me in your post).

Guys, forgive me if my financial terminology is not correct. I am not a lawyer, nor am I a financial person. I am simply playing an "Erin Brockovich" type role here, which I did previously for a class-action involving my Mum that was similar to this one.

Everyone said to us, "blame yourself", "it can't be done", "you should have done proper research first", "there is no one to sue" etc etc, but we won against a major Australian financial institution, and my Mum's financial adviser (and ultimately bankrupted him, and got him a life-time ban from ever being a financial adviser again) and got many many people their money back. So, to those of you who doubt, go ahead. I have stood firmly in these shoes before.

As I said in my original post, no case will be started unless a solid "cause of action" is established. Contrary to what you smart financial people are saying (yes, some of you have been very defensive!) there are some very senior legal minds out there who are currently chewing this over, the idea has not been dismissed at all, as you were so quick to do. There are a lot of people out there who should never have been given a margin loan in the first place, had no understanding of what they were entering into, and the banks did not do thorough checks {yes, remember the good old days of easy credit}.

All I ask is that people who have lost money via a margin loan, make contact; I wasn't asking to be judged - we'll leave that to the Courts. Without actual people to talk to (who've lost $ via Margin Loans) and hear the representations that were made to them by the banks/lending institutions and the financial advisers, the lawyers cannot be sure that there is a solid case.

Contacting me does not committ you anything, and does not cost anything; there is currently no case, this is just discussion, so please play nicely

Regards, Elizabeth

Why does this statement give me visions of a regular joe blow financial advisor getting screwed over on some technicalities of a legal system that at the same time is unwilling to factor the lack of common sense used by an individual when it came to investments.

I'm not looking forward to seeing the other side of this recession given the amount of regulation and oversight that will be needed for the financial and related industries to make sure people don't let greed get in teh way of common sense...

It really is a shame.

I think that last post of Elizabeths should be linked to the RG146 sub-forum...

It would give all those poor people studying for their exams nightmares, and they prob wouldn't complete the course!!

Anyway...in the spirit of the thread :

Elizabeth, I have "lost money using a margin loan". I had to pay a margin call in October last year, approximate value was $7K. Could you get it back for me please? The lender is Suncorp. I do still hold the exact same number of units in the Managed Fund, so could you also please start a suit against the fund to get them to increase the unit price, such that I get my money back?

Thanks in advance,

Chris

I sincerely was thinking about moving in to the Financial Planning industry as well - with the primary intention of hoping to better people's financial lives, but on the way to uni today I was seriously reconsidering the idea. I just have no interest in trying to help others if it only opens myself to the potential for legal recourse down the line if advice isn't 100% perfect.

This sort of stuff has seriously scary implications for the financial planning industry. I imagine if a lot of class actions cases against financial planners are formed and it puts a lot of financial planners out of business (not to mention the need to mitigate the increase risk of legal action against your FP firm), we'd see a rapid increase in the fees required to see a financial planner and they'd be high enough to put such services out of reach for individuals who need them most. A bit like the legal system I guess...

I really think the system is excessively crazy! Yesterday I emailed a friend of 10 years asking for a brief legal opinion on a intellectual property related issue and he was so scared and paranoid about the legal ramifications (in terms of his company and the court system) of me merely emailing him (at his work email) for his advice (as a friend) that he could barely give me a straight answer of why he wasn't allowed to speak with me about the issue.

It is seriously crazy that a good friend can't tell another friend "I reckon you have a case (or don't have a case), but you should seek proper legal advice".