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New tool for analysing your gearing strategies

DAVID Shirlaw heads the research and technical services team at Macquarie Funds Management. In that capacity he often creates tools for advisers to use in their business.

One of the more recent developments is the “gearing analyser”. While the full analyser is on their website and involves a more complex flowchart that goes through the whole process of deciding whether to gear, how to gear and the benefits to be gained, David has encapsulated the process into a nine stage “road map” (see table, left).

This road map really does provide a very effective means by which people can go through the process of making the decision as to whether to gear.

Once that decision has been made it is simply a process of narrowing the field of gearing products to a much more manageable level and then seeking specialist advice or making a decision oneself.

The factors you would take into account at each stage of the process would be as follows:

Stage 1: Data collection is self explanatory, with one having to analyse exactly what their current position is and collecting all the data about one’s financial position.

Stage 2: The key factors to examine are the dollars required to undertake the gearing, the time frame you would need to invest the money for (and that you are able to sustain the gearing) and your ability to tolerate the variation in investment returns that we know fully exist.

Stage 3: Requires you to examine the ownership options. In some cases it could be advisable to have the ownership in an individual name or through a tax structure of some kind such as a family trust or company, or even in a spouse’s name.

Stage 4: It is important to look at the time frame of the investment, source of the security, diversification required, the possibility of a margin call, cost of unwinding the gearing arrangements and the possibility of interest rate increases.

Stage 5: Look at the various gearing products available and examine the level of capital risk, the cost of the product, the capital required, the cash flow required and finally the net asset position required. You would look at the repayment issues such as principal and interest loans, interest only loans, pre-paid interest loans and instalment loans.

Stage 6: Requires you to test the outcomes on three major criteria, such as the cash flow of the outcome, the tax efficiency and the wealth improvement characteristics. Once you have compared the results in stage 7, you would then establish the strategies required in stage 8 and finally, in stage 9, the obligatory review of the process would be essential. It is often this stage that is omitted in any investment strategy.

All too often we come across clients who have had negative gearing strategies that have been established many years ago. Due in no small part to apathy, the clients have allowed these arrangements to continue, even though the strategy had ceased to be appropriate for the current circumstances of the market and/or the client.

The tool developed by Macquarie Funds Management group and David Shirlaw will provide advisers with a good checklist against which all clients requesting some form of gearing can be assessed. It is also a good tool for clients to assess themselves against.

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