Key findings of the Investment Trends November 2013 Margin Lending Planner Report

• Despite improved market outlook, 2013 saw more planners withdraw from margin lending

• It appears that the impact of regulatory reform has not yet finished playing out

• Remaining users intend to increase their margin lending activity over 2014

• A push from planners could certainly help grow the margin lending market

• Pricing remains the main reason planners would switch lenders, but more than last year said they would switch for features

RBA figures show that the margin lending market rose slightly in the first quarter of 2013, but dipped again in Q2 and Q3 resulting in the total outstanding debt to fall to $11.8 billion in September 2013 (down 7% from $12.7 billion last year). Against this backdrop, the ninth annual Investment Trends Margin Lending Planner Report looks at the way forward for the industry. Key trends include:

Despite improved market outlook, 2013 saw more planners withdraw from margin lending advice

Planners’ average return expectation from the All Ordinaries for the next 12 months rose to 9% (excluding dividends), a three year high, in September 2013. In spite of having an improved market outlook, planners continued to withdraw from margin lending over the last year. The proportion of planners advising on margin lending fell from 55% in 2012 to 45% in 2013 and the total outstanding margin debt from the financial planner channel reduced to $4.4 billion in September 2013 (down 13% since December 2012).

However, in line with the improved market sentiment, the direct investor channel has begun to improve with an outstanding debt of $4.7 billion in September 2013 (up $480 million since December 2012).

It appears that the impact of regulatory reform has not yet finished playing out

One third of planners who still advise on margin lending say recent regulatory changes make advising on margin lending less attractive. 13% of current users said they might stop using margin loans as a result of recent regulatory changes, representing 1,000 planners at risk of exiting margin lending advice. Investment Trends Analyst S M Shahed says, “It is evident from our research that the impact of regulatory reform has not yet finished playing out. Further help from margin lenders with compliance and new licensing requirements is essential in order to stop the outflow in the planner channel.”

Remaining users intend to increase their margin lending activity over 2014

Among the planners who continue to recommend margin lending, intentions of writing new margin loans over the next 12 months rose versus the previous study, with 47% (up from 41%) intending to increase their use of margin lending. Improved conditions (interest rate, market, and client demand) would encourage an increase in their usage of margin lending for 77%, but there are many other things providers can do to help planners, such as simplifying processes and protected loans.

A push from planners could certainly help grow the margin lending market

“A push from planners could certainly help grow the margin lending market, as a large proportion of loans written by planners are new loans rather than a shift of clients between lenders,” said Shahed. Only one quarter of recent margin loans established by planners were replacement loans. In contrast, two thirds of the recent loans established by direct investors were replacement loans.

Pricing remains the main reason planners would switch lenders, but more than last year said they would switch for features

37% of planners say they would switch their main margin lender for lower interest rates (down from 47%). On average they would look for a reduction of 59 basis points in the interest rate for switching to a new lender. On the other hand, 29% of users (up from 20% last year) would switch their main margin lender for better features, citing on average eight different features. The most sought after features include margin call protection (51%) and early margin call warning (50%).