Securities-Based Lending Remains an Attractive Option for Investment Clients

Even in an environment of rising interest rates, clients beyond the ultra-wealthy can access securities-based lines of credit to meet their goals while preserving assets.

Many high-net-worth individuals have attained a level of security from which they have varied options for making large purchases. Securities-based lines of credit can provide these individuals with the freedom to access funds quickly and conveniently — for planned or unplanned expenditures — while leaving their long-term investment strategy intact.

It’s true that today’s financial environment is nothing if not unpredictable as we encounter rising interest rates for the first time in decades, with some economists even forecasting the possibility of a recession. Still, for certain well-qualified borrowers, securities-based lines of credit remain viable and even prudent options to access cash while preserving capital.

A refresher on securities-based lending

Securities-based loans are consumer financial instruments secured against an existing investment portfolio. For clients who have accumulated sufficient assets, this solution provides an avenue to obtain ready liquidity without disrupting their investment strategy. 

Securities-based loans enable clients to retain control over assets pledged as collateral and avoid the need to liquidate securities at an inopportune time. They also provide the flexibility to use business, trust, personal or eligible third-party accounts to secure financing.

Clients and advisors may choose to access funds based on securities because this option is:

• Competitive, with rates that may be lower than traditional lending solutions.
• Flexible, in its terms, with funds that can be used for a wide variety of purposes.
• Liquid, providing rapid access to funds via ACH or wire transfer.
• Streamlined, offering fast credit approval (often within days instead of weeks or months).
• Tax-efficient, avoiding the need to sell securities which could trigger capital gains tax liability.

Balancing securities-based lending against market changes

These days, many investors are embracing a more cautious approach. After all, together with their advisor, they’ve set in place a strategy to carry them through the volatility of the past few years and whatever the future may hold. As the market rises and falls, they may wish to avoid being forced to sell securities when funds are needed quickly.

Borrowers may take pause because interest rates are rising for the first time in years. But because qualified borrowers for securities-based loans typically tend to have a high-net-worth as well as an exceptional credit rating, they generally qualify for highly attractive rates. That will not change, compared to other borrowing options, even as rates increase.

Securities-based lending options also offer several other appealing features. Many times, these instruments have no set-up or maintenance fees. Funds are generally available very quickly — often within days. And of course, they offer the opportunity to avoid the taxable event of a securities sale.

There are a few caveats. Because of the inherent volatility of the market, if a client’s holdings significantly decrease in value, a lender could require borrowers to deposit additional cash or have some of the portfolio liquidated to cover the gap. To avoid facing this situation, some advisors recommend that borrowers do not tap the maximum lending of their portfolio value at any given time except for very short-term needs.

Not just for the uber-rich

Borrowers for these types of credit lines include high-net-worth individuals and small business owners seeking flexible options to manage today’s financial needs while protecting their wealth and maintaining their objective for capital appreciation.

The securities-based lending spotlight is sometimes on ultra-wealthy borrowers who may leverage their investments to purchase a yacht or a private jet — uses that may make sense for them. But the instrument can also offer a judicious option for a much broader group of investors who wish to make an all-cash offer on property, fund renovations, purchase business inventory, invest in a franchise or cover significant educational expenses.

For others, a securities-based loan can offer ready cash for an emergency without the hit of capital gains tax at an already challenging time. And it can offer an option to maintain existing cash reserves in the face of rising interest rates, while still delivering the increased flexibility that these borrowers expect.

Choosing a lender wisely

Independent broker-dealers often lack the built-in resources of a large money-center banks while facing attendant constraints. Yet independent broker-dealers do have the option of offering a white-labeled securities-based loan product. Teaming up with a bank that extends advisor’s capabilities for their clients can enable them to do much more based on their trusted relationship.  

One company that values this approach is Matson Money, a Registered Investment Advisor managing over $9 billion for more than 30,000 individual clients across the United States through its relationships with more than 500 independent financial advisors. 

Matson Money works with Western Alliance Bank , Member FDIC, as part of its key strategy to provide all the services their clients need. That approach is in particularly high demand from digital-native investors, members of the millennial generation and Gen Z, who are accustomed to handling all of their financial needs in one place, from the comfort of their phone.

According to Founder and CEO Mark Matson, “Western Alliance Securities-Based Lending offers independent financial advisors working with Matson Money the ability to deliver key private banking solutions to their clients, which provides a valuable competitive advantage.”

About the author

Daniel Babayan is the managing director of Western Alliance Bank’s Securities-Based Lending group. A 30-year banking veteran with extensive expertise in the securities-based lending industry, he leads the team that offers securities-backed lines of credit designed for clients of independent broker-dealers and registered investment advisors. Contact him at 602-389-3531 or [email protected].

*All offers of credit are subject to credit approval, satisfactory legal documentation, and regulatory compliance.
*Consult your tax advisor