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Demand grows for investment loans

By Alain Thériault | April 18 2007 06:08PM

A growing number of industry surveys are showing that baby boomers’ retirement funds are falling short of their objectives. As a result, investment loans are quickly becoming a windfall for advisors that are seeking new solutions to ease the anguish of their main clientele.

Investment loans are often called leveraged loans because they allow investors to make a third party’s money grow to their advantage at a low cost. The latest products even allow investors to borrow without collateral, a sign that the market is reaching out to a clientele with more modest means.

Talbot Stevens, a leveraged loan strategy consultant, has long believed that everyone could harness this strategy to attain their retirement objectives more quickly. On a quest for new markets, financial institutions asked him to examine this opportunity exclusively a few years ago.

In response, he has produced software that helps advisors and investors craft a made-to-measure leveraged loan strategy. He also published a book extolling the benefits of leveraged loans, Financial Freedom Without Sacrifice, which has sold 145,000 copies. In addition, Mr. Stevens has developed training sessions in leveraged loan strategies for financial advisors.

From a privileged vantage point, Mr. Stevens has seen this market – previously reserved for the “rich” – branch out to investors with average means.

“In 2001, there were ‘no-margin call’ loans, but they have become the more usual way right now,” Mr. Stevens points out. Conservative institutions that had previously shied away from this type of loan are now eagerly wading into the market, he adds, referring to banks and insurance companies.

The future of these loans lies in average and medium-high investors that have a good capacity to repay a loan (cash flow) and that need a helping hand to attain their retirement objectives, he says.

He also projects that the market will expand steadily as financial advisors’ comfort level with this investment strategy rises.

Institutions are also feeling the groundswell: “We are in a growth phase for this product,” says Tricia Barry, vice-president, marketing, at B2B Trust. The idea of borrowing to invest is not new, but the idea of easily gaining greater exposure to the financial market, even double it, is attracting growing attention,” she continues. “For some products, the client doesn’t supply any collateral.”

The potential market is growing, and it is happening now, she explains. Many advisors that had never really offered investment loans before are entering the game, Ms. Barry adds. “It’s a growth strategy they’re aiming at their baby boomer clients.”

The baby boomers, again? Ms. Barry explains that this class of investors is mainly people whose savings capacity is hampered by mortgage payments and RRSP minimum contributions. As a result, they do not have enough money left to invest in fully attaining their retirement goals. Advisors are looking for ways to help clients find that extra dollar they need to achieve all their goals, she continues.

Scott Bergen, product director at Manulife Bank, is another believer in the continuing expansion of this market. “There are many more products in the market that make leverage more accessible than ever to a broader clientele.”

Manulife has seen steady growth in this sector for five years and “there are no reasons for it to slow,” Mr. Bergen says. “Leverage is a powerful strategy that yields superior results to continuous monthly investment programs when used over the long term.”

Mr. Stevens thinks there are several reasons for the sudden popularity of leveraged loans. For one, insurance activities are increasingly concentrated in investments. After the bear market of 2001- 2002 cooled investments, financial institutions had to find another avenue. They found leveraged loans.

In addition, the arrival of insurers in the investment sector and the marked growth of financial planning gave the leveraged loan approach a powerful shot in the arm, Mr. Stevens points out.

Furthermore, advisors and their clients are more sophisticated than ever. Mr. Bergen believes that the widespread fallout after the tech bubble burst energized the leveraged loan market. Investors that lost with equity investments in the late ‘90s, he explains, now feel more comfortable with a leveraged strategy in mutual or segregated funds.

Heated competition

The players in this lively market are keeping the statistics to themselves. Market share objectives? Assets under management? Number of advisors? Loan volume? All these questions were left unanswered. Only B2B Trust would allow that its investment loan volume is in the billions.

This is not to say that competition is not fierce in this business sector, Mr. Stevens says. “As soon as a player launches a new feature, the others quickly emulate it,” he points out.

According to him, the most aggressive players today are Manulife Bank and AGF Trust. AGF flaunts its three to one no-margin call loan in super-sized font on its website. To invest $100, for example, investors need only lay down only $25, and AGF will lend them the remaining $75.

These aggressive players have an edge, Mr. Stevens explains, they have their own segregated fund line.

Manulife offers its financial advisors a special program. Advisors’ clients that invest in its Select and IncomePlus guaranteed investment funds can qualify for a three-month interest free loan. The application process is simple and no collateral is required for leverage up to $250,000. The Manulife product has no-margin call and features interest-only payments. It is offered at the prime rate plus 1.5%.

B2B Trust and Bank of Montreal have been major players in the agency segment for several years, while National Bank is asserting itself as a serious contender, Mr. Stevens continues. He sees MRS Trust (Mackenzie) and TD Canada Trust as more marginal but still active players.

Claiming to have joined the game too recently, Dundee Bank declined to contribute to our comparison table and had not returned our calls by press time.

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