There is a significant lack of education among financial advisors on the risks and opportunities associated with leverage strategies, according to financial educator and industry consultant Talbot Stevens.

In a presentation on leverage at a compliance conference in Toronto on Tuesday, Stevens called for more education and tools for advisors to better serve clients and reduce risks associated with the use of leverage.

“There is a definite lack of knowledge in the industry,” he said, noting that the Certified Financial Planning program includes very little content covering leverage strategies.

Many different investment strategies are associated with the use of leverage, including debt swaps, RRSP catch-up loans, Smith Manoeuvres, margin accounts, leveraged ETFs, and others. Stevens warned that many of these strategies are complex and controversial, and involve a variety of different risks.

He said advisors need to thoroughly understand these strategies in order to determine whether they would be well-suited to their clients. For each client, advisors must consider factors such as their tax bracket and time horizon in order to determine whether leveraging would be beneficial.

While many advisors and investors consider leverage strategies far too risky to use, Stevens said when used responsibly, leverage could actually reduce the overall exposure to risk of a portfolio.

“Lots [of leverage] is generally very dangerous,” Stevens said. “Ironically,” he added, “if you have a very small amount, you should actually reduce the total risk and, as a bonus, have a higher wealth result on paper, then you would otherwise.”

Stevens calls for the establishment of a comprehensive certification course on leverage in order to educate advisors. In addition, he suggests that software tools could be designed to help advisors analyze potential leverage strategies and the impacts they would have on specific clients.

The industry also lacks standards on the types of advice and disclosure that is acceptable and professional, according to Stevens. He calls for the establishment of standards, with templates and specific examples to address unique issues associated with each leveraging strategy.

IE