Entrepreneurs do not typically like to use the word “leverage” on their balance sheets, given the risk they are undertaking—financial leverage results from using borrowed capital to amplify the potential returns on an investment. However, the potential downside risk in the case that the investment does not pan out is also high. Xerxes Mullan, Global Advisor for financial advisory Avestar Capital, says, “There is a concept of smart leverage. We should actually consider this as an asset and not a liability”. Avestar Capital is an independent global advisory boutique with a focus on developing personalized, integrated financial plans. Avestar Capital is an entrepreneurial venture, and the team is geared towards managing complex balance sheets with growth-oriented investing strategies.
The success of one such investing strategy- an excellent smart leverage strategy is based on the ability to monitor and consistently be down in a disciplined fashion and manage the debt efficiently so that you don’t run a foul or create any risk on the balance sheet. As long as one gets this done, leverage can be an extremely powerful tool in your toolbox. Given the interest-rate environment being at historic lows, there are unique opportunities from a leverage investment point of view. Low-interest rates really tend to favor a leverage investment, and this can be utilized effectively on the balance sheet.
Leverage can also be incredibly useful for start-ups or small businesses since they do not own a lot of capital or assets. Using small business loans and credit cards will help tide their business operations over until they start making profits. It is also important to remember that from a tax perspective- when a loan or line of credit is taken out, the interest payments are tax-deductible. This makes the use of leverage even more useful and beneficial. Investors also use leverage to increase the return on investments. Various financial instruments such as options, futures and margin accounts are used. Using leverage also gives investors more flexibility. By leveraging, they can considerably increase their purchasing power and potentially invest more at one time with smaller amounts of cash and larger amounts of debt.
Investing in real estate remains to be a popular way to diversify your portfolio. Rather than going to third-party leverage, assets in the real estate space are optimal from a leverage or self-leverage perspective on the balance sheet. Construction loans and self-funding leverage can be quite efficient. With the low-interest rate environment, financial planning strategies can be very effective from a trust perspective. ESR rate is a rate prescribed by the government on a monthly basis that one can use for inter-family trust borrowing capabilities on elements like GRAT (grantor retained annuity trust). Creative-split interest trusts are one of the highly favored estate-planning strategies to minimize taxes when giving large financial gifts to family members.
Along with leverage one must also change the asset allocation strategy to drive more income so as to manage this leverage. This intrinsically reduces the overall risk from growth to income and helps portfolios withstand more volatile times. The leverage feature inherently gives you the compounded return that one is looking for, and one does not have to undertake too much risk from a portfolio perspective.
Ultra-high-net-worth clients who have large balance sheets have the ability to have creative lending and custom lending strategies which are not available to anybody else. Financial planners should take advantage of this unique opportunity by using leverage as an asset and not a liability in the balance sheet and create a smoother long-term experience for clients. There could also potentially be some tax benefits which should be realized.