Transcription of Finance News Network Interview with Shield Wealth, Self–Managed Superfunds Specialist and Senior Financial Planner, Wayne Lear
Carolyn Herbert: Hello I’m Carolyn Herbert from the Finance News Network and joining me from Canberra based financial planners, Shield Wealth to talk about incorporating warrants into client financial plans is self-managed superfunds specialist and senior financial planner, Wayne Lear. Wayne, welcome.
Wayne Lear: Thank you Carolyn.
Carolyn Herbert: Can you start by telling us a little bit about the sort of business you run, your type of clients, portfolio size, that sort of thing?
Wayne Lear: I started in 1982; self-managed superfunds and our clients were direct clients. I went fee for service in 1988, because the advice I was giving to public servants was to basically keep the pension, and not the lump sum. And there’s no commission in pensions, but as a result of that I went fee for service in 1988. And what transpired out of that was that many of the public servants had direct shares, and what came out of that then was margin lending.
So I built up a very big practice of individually managed accounts in direct shares, using margin lending as a tax strategy and a wealth creation tool, over many years. And as we built up, and back then the average portfolio size was probably no more than maybe $100,000 - that was in the Nineties. And as the Nineties moved on, as we went through the Gulf wars in the early part of the Nineties into the next century, a lot of my clients then were moving and getting very close to retirement.
And so I moved them into superannuation, self-managed superannuation, as a strategy for wealth creation into retirement and to preserve their asset. And it was at that point there that warrants became a huge strategic tool that I used, to transition margin-lending clients into self-managed funds. Because using a warrant meant that they could pay out their margin loan, but still maintain the same level of exposure to the market.
Carolyn Herbert: How long have you been including warrants in some of your portfolio recommendations?
Wayne Lear: I’ve started with warrants from the very beginning. So in 1990 I think, Macquarie Bank (ASX:MQG) issued one of the first warrants in Australia, which was an endowment warrant. I took that on board for some of my higher net worth clients back then. And those clients have since had two; one’s had three rotations of these warrants, so they’re all very happy with it. The more modern warrants, which is the instalment warrants, the MINIs, those are more structured sexier types I’ve been using, again, since they’ve been launched.
Carolyn Herbert: Do clients come to you asking about warrants or do you suggest them?
Wayne Lear: Clients don’t come in asking about warrants, no not at all. That’s the furthest thing from their mind. We would suggest a warrant or some sort of leveraging process, depending on the client and depending on the size of money that’s involved. And depending on timeframes, a whole raft of issues at the moment.
Carolyn Herbert: What are some situations where you might suggest warrants to help meet investment objectives?
Wayne Lear: These days it’s all very, the landscape’s changed dramatically these days. So the reasons for the warrants back in, dare I say it, pre-FOFA versus post-FOFA are a little bit different, because of the compliance issues. These days a warrant I would use for an entrepreneurial type client, or a client who has a risk tolerance that’s slightly higher than the norm. And who has got a significant amount of money in their self-managed fund, of which with the sector that deals with Aussie shares, so the Australian share weighting. If that’s quite significant in terms of dollar amount, I would suggest maybe 10 or 15 per cent of that Aussie exposure into a warrant.
Carolyn Herbert: Would you say there are any particular aspects of warrants, which clients find difficult to get their head around?
Wayne Lear: Yes everything, the whole lot. So there does require a lot of education. The best way I explain it to clients is, it’s like buying a house with a mortgage attached. So the behavioural finance side of this is really fascinating. It is so fascinating, because I’ve had clients coming in who have wanted to wind up their warrants, because they think it’s very very risky. Yet they’ve got four leveraged real estate houses, residential real estate and they’ve got one to two million dollars worth of borrowed funds over there. They don’t see that as risky, because they’ve got a house and yet over here, they’ll see it’s risky.
So there’s a lot of client education that needs to occur here. And once people understand how a warrant works and when’s a good time to buy them, then they work wonderfully well.
Carolyn Herbert: Taking a bit of a look at it from your side, a financial planning side. Would you say there’s much more administration involved, when including warrants?
Wayne Lear: There is a lot of administration involved in running warrants, if you don’t use a platform that deals with them. So there’re a number of platforms out there in the marketplace. The only one that I know that actually will treat the warrant from the lowest common tax denominator up is the OneVue platform or Wealth Portal. And they built that system on debit and credit, double entry accounting system. So they’re able to handle the complexity around particularly, capital gains tax.
And I do know the Tax Office has gone to them to train their staff, on how tax works on warrants. So if you don’t have a good, if you don’t use a platform that can handle warrants from a tax basis, yes they are a little bit complex.
Carolyn Herbert: Looking at warrants from a more broader advisory perspective. Would you agree that many advisors have little knowledge about warrants and how they actually work, do you agree that’s the case?
Wayne Lear: Absolutely, there’re two types of advisors I think these days. There’re old people like myself, who’ve been around for a long time and always trying to be innovative. And then you’ve got all the newer breed of financial planners coming into the marketplace. The landscape’s changing dramatically and the newer type of financial planners, the young lads coming in, they’re very focused on compliance and all the legislation that we have to operate under. And it’s just such a pity that they are burdened with that, which means that they really do need to know what they’re talking about, in order to sell warrants.
Carolyn Herbert: What would you say the main reason is then that there would be some sort of reluctance there, to use warrants?
Wayne Lear: Their dealer group, their compliance, professional indemnity insurance, those sorts of issues are big, big issues. And the irony of it is, that right now, the economic conditions that we have in Australia right now; that is low interest rates, fantastic dividends, a market that’s been subdued for sometime, is the perfect economic environment to be buying warrants.
Right now is the time to be buying warrants. You don’t go and buy them when interest rates are very, very high, the market’s already had its run and the dividends are low. Now when you do your math, when you do the math on warrants, now is the perfect economic conditions to get into warrants.
Carolyn Herbert: For any advisors watching this who perhaps haven’t considered including warrants as investment tools, what advice would you give to them, or what would you say to them?
Wayne Lear: This is another arrow in your quill, another bit of ammo that you have got in adding value to your relationship with your client. Because these days, the big issue in the industry is how do we add value and charge for it. How do we add the value and charge for it? Gone are the days of commissions, gone are the days of getting a percentage of a loan, so therefore, we have to figure out how we add value.
Understanding a warrant and being able to communicate the simplicity of a warrant to clients will put you above it, head and shoulders above the rest. In other words, you’re demonstrating to your client that you know something a little bit different than anybody else, and it might be the first time they’ve ever heard that. And they’re not scary; they’re very safe if you understand them. And if you keep the LVR, I always keep the LVR at sort of 50 per cent or less; you really can make a difference to the client portfolios.
Carolyn Herbert: Wayne Lear, some good advice there, thanks for your insights into warrants.
Wayne Lear: Thank you Carolyn.