By John Drachman
Margin investing can offer flexibility, but it must be done with care. One way to manage margin risk is to take time to shop around for those firms that offer lower rates. And, with interest rates still at relative lows, some brokers are passing savings on to their retail investor base in the form of lower margin rates. Investors looking to unlock the value in their portfolios are finding they can borrow more cheaply these days to invest in other opportunities.
To utilize margin, individuals need to sign a margin agreement with their broker. Many brokerage firms even offer margin accounts when a trading account is first opened because it offers additional investment flexibility, says Jeff Chiappetta, vice president of trading services at Charles Schwab (SCHW). Marginable securities include stocks, bonds, exchange-traded funds and mutual funds, but there are nuances, he added: “For example, a low-priced stock or a stock that doesn’t trade on a recognized stock exchange might not be available for margin use.”
Three for the Money
The team at Optimized Portfolio put together a handy spread sheet that shows you where to look for margin rates on-the-cheap. Some brokers offer tiered rates that decrease slightly as your loan balance increases. The numbers below compare rates at the $100,000 level because that was the median tier in most of rate tables. While their rates were taken directly from each broker’s website on July 5, keep in mind that rates may vary. Here are three top picks:
- Lowest of the low: Interactive Brokers offers a 1.55% margin rate. There is a trade-off however: The Interactive Brokers interface can be downright confusing – and decipherable only to the most sophisticated investors.
- Only $5000 to open an account: For another 45 basis points, investors with as little as $5000 to leverage can take advantage of M1’s 2.00% rate. Unlike Interactive Brokers, the online customer experience is simple and intuitive. Beyond low rates, M1 is determined to attract more of your attention and assets with a bevy of clever digital tools like rules-based engines for alerts and trading strategies based on parameters you set.
- Making margin investing fun again: Following last year’s harrowing suicide of a young Robinhood investor, who may have misunderstood the paper losses generated by a margin call, the firm settled a lawsuit this month with the deceased investor’s family. Meanwhile, FINRA ordered Robinhood to pay about $70 million in fines and restitution for harms to other customers. Hoping to turn the page as it prepares to go public, Robinhood amped up its gamified website with even more entertaining visuals as it promotes the firm’s still very low 2.50% margin rate.
If you are at a point of your life when you want more excitement from your portfolio, investing on margin offers a near instantaneous way to up your portfolio’s ante. At the same time, sharing your thinking with an investment professional can help you stay aligned with your personal risk and reward profile. With some professional validation, you can both buy on margin – preferably on assets allocated for that purpose – while ensuring the rest of your portfolio stays on track.
John Drachman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. John is an IABC award-winning writer, who applies his 30 years of financial marketing experience toward advancing the dialog between investors and investment professionals.