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In theory, the premise of securities-backed or securities-based lending (SBL) is easy to explain and can be attractive to a broad swath of clients. Put simply, SBL involves using securities in an investment portfolio to obtain a loan backed those securities.
The uses for that cash are, in many cases, limitless. It can be used to pay-off consumer debt or mortgages, finance long-term care or buy a second property. SBL offers other benefits to clients.
Selling investments to cover an expense creates tax liabilities and means the client has a smaller portfolio and the advisor has fewer assets to manager. Likewise, personal loans and HELOCs create long-term liabilities and thanks to rising interest rates, interest payments are higher on these products today than they were in 2020. For example, borrowers with excellent credit might be able to find a personal loan with an interest rate of slightly below 5%, but the reality is they’ll likely pay somewhere in the neighborhood of 7% to 8% on a $10,000-plus loan.
However, many myths remain about SBL, indicating advisors can clear up those misconceptions while helping clients along the way.
Common SBL Myths
As Nationwide’s Debra Griffin observes, there are five SBL myths advisors should bust for clients interested in this form of accessing cash. Those are as follows: SBL is only for the wealthy, it takes long periods of time to access the capital, SBL is entirely based on need, it’s “bad” debt and it’s only worth embracing when interest rates are low.
It’s easy to see why the first and third points are misconceptions because if SBL was based on need then it wouldn’t be reserved for the wealthiest investors. There was a time when that was the case and high-net-worth clients would tap SBL for big-ticket expenditures on education, real estate, taxes and even discretionary items, but that landscape has shifted. Today, SBL is more accessible and can serve an assortment of uses for a variety of clients.
“They may think they need to liquidate a portion of their portfolio, which could affect their future savings goals and has the potential to trigger capital gains taxes,” notes Griffin. “SBL can be used to access cash without disrupting investors’ portfolios and can be opened proactively, so funds are available when clients need them.”
Regarding the amount of time it takes a client to receive SBL, technology has helped that period decrease dramatically over the past several years. Some lenders have even cut the accessibility period down to a matter of days or a single business day.
Addressing Debt, Rate Concerns
As advisors know, many clients agonize over debt and view all forms of debt as “bad.” In the eyes of many clients, mortgages are the exception, but SBL can fall into that sleeve, too. There’s credibility to that notion because as Griffin points out, tapping investments to access cash can add “holistic net value to a portfolio.”
As for interest rates, that is a relevant concern, particularly at a time when lending rates are high due to the Federal Reserve raising rates to ward off inflation. The good news is that SBL usually carry lower interest rates, regardless of rate environment, than traditional lending products.
“Investors can generally get a lower interest rate through SBL than traditional loans, home equity lines of credit or credit cards since it’s their investments being used as collateral,” concludes Griffin.