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Written by: Peter Stanton | Advisor Credit Exchange
Fifteen years after the 2008 financial crisis, Americans are experiencing yet another tight credit market. In February 2023, the Mortgage Bankers Association’s Mortgage Credit Availability Index declined to its lowest level since January 2012, and the 30-year, fixed-rate mortgage has increased from 2.67% to 7.08% in under two years. These trends have been driven in large part by the Federal Reserve’s interest rate hikes, as well as the balance sheet crisis affecting U.S. and international banks.
In short, the era of low interest rates and easy access to liquidity following the financial crisis is gone. Consumers seeking mortgages, home equity loans, auto loans, and other credit products are feeling the pinch. Unless they are willing to pay higher rates to the shrinking number of banks willing and able to underwrite loans, they will have to wait for rate reductions and a resumption in easier access to credit.
However, at a time when banks are tightening the flow of liquidity, financial advisors have an opportunity to save the day by providing access to high-quality credit solutions. Truly holistic wealth management involves managing both sides of an investor’s balance sheet—assets as well as liabilities.
The common types of liquidity solutions that advisors can provide clients include:
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Margin Loans: These products are specifically utilized to fund the purchases of securities. Demand for margin loans increased in March 2023, after the Federal Reserve began accepting assets at par and backstopping deposits in its bank term funding program.
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Securities-Backed Lines of Credit (SBL): These instruments, which provide financing for consumers using securities/investments they hold as collateral, allow borrowers the flexibility to repay at their own pace. Because they are secured by assets, they typically provide larger credit lines and lower rates than unsecured consumer loans. What’s more, they usually cost nothing to establish, so many foresighted investors can set them up for funding future needs, as well as to be prepared to meet unexpected expenses that may arrive from time to time.
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Mortgage Loans: Mortgage loans are often a client’s largest credit—if not single largest financial need. Like SBLs, they command secured rates of interest for financing large amounts. However, the best-fit home financing solution for a client also needs to take into account their risk tolerance, cash flow, opportunity costs, and down-payment resources and tax circumstances. A mortgage at a great rate may still be a poor fit, so clients should seek guidance from both their financial and tax advisors. Fully holistic wealth management advisors can demonstrate significant value by addressing clients’ typically #1 borrowing need by providing insights and options for purchasing or leveraging property with a full suite of mortgage loan options.
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Signature Loans: These are unsecured personal loans that can provide short-term, immediate liquidity. Borrowers don’t need to pledge collateral, but simply sign an agreement to repay the loans over a designated time. While they may be subject to greater scrutiny and potentially higher—but still competitive—interest rates than other types of loans because they are unsecured, signature loans can give clients fast liquidity without having to leverage or liquidate assets. These could be good options for clients that need liquidity to pay a tax bill, implement a home improvement, or meet emergency expenses.
While it may appear that advisors at wirehouses have a significant advantage over smaller, independent competitors when it comes to access to, and advice on, credit, modern technology is leveling the field. With more choices, in some ways, they can, arguably, enable independent advisors to deliver more than what some of the wirehouses may be offering.
Some digital wealth management platforms in today’s marketplace enable independent advisors and registered investment advisors (RIAs) to access, and provide guidance on, credit products from trusted lenders, including large banks. By connecting advisors directly with lenders, these platforms can allow advisors to identify the best loan for which their clients are qualified, at the best rate.
The capability to offer credit products and insights can make a big difference to an advisor’s business. According to a survey report of U.S. financial advisors and other wealth management industry personnel published earlier this year by Datos Insights, RIAs scored lowest in the percentage of practices offering credit and debt services and management (65%), while 91% of wirehouses, 84% of bank broker-dealers, and 79% of independent broker-dealers (including hybrid advisors) do so.
In addition, 90% of advisors (with three or more years of experience, primarily serving individuals and families) with $1 billion or more in assets under management offer credit and debt services and management, compared to 73% of those with less than $100 million.
The Way Forward
Online credit exchanges that connect advisors of any practice size with best-in-class lenders, within their existing technology ecosystems, can eliminate these disparities. Advisors can utilize these platforms to identify which types of loans their clients would most likely qualify for and create client-facing proposals for loans that would likely receive lender approval. Some of these exchanges also provide advisors with on-demand support from credit and lending experts.
These platforms enable independent advisors to offer access to, and evaluation and management of, the same types of credit products as their larger counterparts, at a time when clients need them most.
Many are hoping for an easing of credit accessibility in late 2023, or in 2024. Whether or not this development occurs, advisors of all sizes have it in their power to help clients obtain the liquidity they need through the utilization of innovative technology solutions.
Peter Stanton is CEO of the Advisor Credit Exchange, a technology-empowered network that brings together lenders and wealth managers to give financial advisors new opportunities for helping clients achieve financial wellness.