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I’ve highlighted securities-backed lending (SBL) several times in this space and it can be a useful option – one not often thought of – for clients that need cash for whatever reason.
Securities-backed loans (SBLs) are credible alternatives to the other avenues through which many clients access cash when they need a large amount of it. Those include a home equity line of credit (HELOC), personal loans – many of which don’t come in large amounts – or selling of assets to generate needed capital. There are drawbacks to those choices. HELOCs create long-term liabilities and if accessed in the wrong interest rate environment, can be particularly burdensome. Likewise, there are tax implications if stocks or bonds are sold at a profit, regardless of what the seller’s motivation is.
Plus, selling an investment to meet a near-term cash crunch means the client misses out on longer-ranging upside potential. That’s not a concern with SBLs. A securities-backed loan is a line of credit derived from the client’s portfolio. In a hypothetical example, Jane has $250,000 in non-retirement assets and she wants to access $25,000 for home improvements. SBL might be appropriate for her and perhaps a better idea than a HELOC or personal loan, particularly if she has a long-term investing horizon and isn’t imminently approaching retirement.
Again, SBLs are often overlooked relative to other forms of loans. Some clients might not even be aware of this genre of lending, so it’s on advisors to articulate the benefits of this style of credit for clients that need cash.
SBLs Aren’t ‘Bad Debt’
People often view debt in negative terms though there is some allotment for mortgages as “good debt,” but the point is debt isn’t viewed in a favorable light. Nationwide’s Debra Griffin says SBLs warrant a different perspective.
“Clients tend to think of debt as a negative when it comes to their overall financial picture, but when debt is leveraged properly it can actually be enriching,” she notes. “SBL can allow your clients to fulfill other financial goals without having to liquidate their available funds or assets. This gives them the flexibility to pay off existing debt or let their portfolio grow instead of having to liquidate assets to cover financial needs.”
While that might convince some clients SBLs are good ideas, many are bound to have more questions. Two of the big ones are likely to be “Are SBLs akin to margin loans?” and “What assets can be used to back an SBL?” Addressing the margin loan query, there are some similarities, but SBLs CANNOT be used to purchase more investable securities. As for what assets can support one of these loans, typically it’s bonds and equities held OUTSIDE of a retirement portfolio.
“Lenders calculate credit lines based on the value and type of assets in the portfolio. Typically, they advance a percentage of the pledged assets (e.g., XX% of stocks, mutual funds and ETFs),” adds Griffin.
More SBL Perks
There are other perks associated with SBLs. As noted above, because it’s a client’s assets supporting the loan, no asset sale is required meaning there are no negative tax implications. And because there is an asset backing the credit, the interest rates attached to the loan are favorable relative to other loans and that’s true even when rates are high.
For the advisor, because no assets are sold, the assets are retained with no subtraction from firm AUM and that benefit comes along with helping clients. Plus, the repayment terms are attractive.
“Clients can choose repayment options that suit their financial situation, including interest-only repayment options with no rigid payment schedule,” concludes Nationwide’s Griffin.
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