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Advisors have likely encountered this scenario before: A client calls or comes into the office facing either a large, unexpected expense or an equally hefty long-term, planned purchase.
Obviously, they need cash and many clients that are not in the high-net-worth stratosphere may not have the capital lying around to deal with big expenses. That doesn’t mean there are not options for generating that cash.
As advisors know, those options include a home equity line of credit (HELOC), personal loans or liquidating assets that are held outside of a retirement account. Indeed, those are efficient, quick fixes for significant expenses, but those ideas aren’t perfect.
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.
Enter securities-backed lending (SBL) as an alternative to above ideas.
Exploring SBL
In simple terms, securities-backed lending is exactly what it implies – a loan against non-retirement investment portfolios. The “non-retirement” qualifier is important for advisors to convey to clients interested in SBL because no matter how large the clients’ 401(k) or IRA balances, lenders in this space don’t lend on assets held in those accounts.
Essentially, 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.
“Another appealing benefit of SBL from your client’s point of view is that holding onto their assets means they can continue to receive benefits such as dividends, interest and appreciation. And if they’re eager to leave a legacy to their heirs, preserving the portfolio can be a more thoughtful long-term plan,” notes Debra Griffin of Nationwide.
Of course, SBL isn’t appropriate for all clients and some would be loath to part with assets to pay for, say healthcare expenses, but there some perks with this form of accessing capital.
“SBL can be considered for a variety of large expenses, ranging from tax payments to a real estate purchase, from emergency cash to a home renovation. But it should be noted that a securities-backed line of credit cannot be used to purchase additional securities,” adds Griffin.
Other SBL Perks
The advantages of SBLs don’t end there. Hopefully, most clients aren’t in a position where they have to worry about personal credit scores, but if they are, SBL is an avenue to consider because credit is less relevant here because the lender knows the loan is backed by a liquid, identifiable asset.
Additionally, interest rates on SBL products are usually superior to those of HELOCs and personal loans and come with lower transaction fees.
“Perhaps the most compelling reason that SBL could be a suitable solution is that interest rates tend to be lower than those of a traditional loan—and the cost of funding via SBL usually compares favorably vs. a HELOC, too,” concludes Griffin. “Unlike a traditional term loan, most types of securities-backed lines of credit don’t have a stated maturity or fixed repayment schedule, giving clients more flexibility to manage the line of credit as they wish.”
Related: Inflation Is Playing Out in Retirement Expectations