Financial planning is really about… realising debt can be good

We do not want to sound like Gordon Gecko, but debt can be good.

Most people will not create much wealth if they cannot use debt.

Discuss debt with your client. Find out what your client thinks about debt. How much, when and why. Did debt help them build their wealth? Did debt cause any problems? What went right? What went wrong?

Once you have a handle on your client’s attitude to debt, explain yours.

Most financial planners believe that debt is one of the best ways of building wealth, provided it is used intelligently. The proviso that debt be used intelligently is critical. It means:

  1. consumer debt is almost never a good idea;
  2. expensive debt is never a good idea;
  3. investment debt cannot turn a bad investment into a good investment; and
  4. non-deductible debt is particularly expensive.

We could go on.

Explain to your client that in the past the average long term earning rate on Australian shares and Australia property has been more than 9% per annum. This is well above the average cost of borrowing. Most Australians who have borrowed to buy shares or property have done well. The return has been greater than the cost. Gearing has worked.

Forecast for your client that it is probable, but not certain, that this phenomenon will continue. The expected rate of return on Australian shares and Australian property over the next twenty years is again greater than the expected costs of borrowing. Therefore most Australians who borrow to buy shares or property and hold them for the next twenty years will almost certainly do well.

Stress the twenty-year time horizon. We are talking long-term trends – not short-term market gyrations. Investing using debt is a long-term proposition. It’s decades, not years. It’s even an inter-generational proposition: borrowing to buy good quality representative assets now, holding them across the generations and reinvesting the net earnings each year, is the safest and surest way to build wealth for your family.

And remember, you can’t advise your client on their investments if they do not have any investments. So investing clients represent a sweet spot for advisers: your interests coalesce with your clients’ interests. 

The Dover Group