Why securities-based lending has become 'table stakes'

It's been roughly a week since TIAA Wealth Management announced a partnership adding a securities-backed line of credit to the services it offers. And according to one of its leaders, that move benefits both sides of the advisor-client relationship.

"Clients are looking for help beyond investing. They are looking for a one-stop shop experience," Shankar Saravanan, senior managing director and head of wealth products at TIAA, told InvestmentNews in a recent interview. "We are also helping advisors so that they could add value more than their [investment] returns.

According to Saravanan, advisors are looking to help their clients across the balance sheet, going beyond investments to provide value across all aspects of wealth. While TIAA's bread and butter has traditionally been around insurance and investments, he says securities-backed lending has become "table stakes" across the wealth industry, with assets in taxable accounts being used as collateral. 

One study by the Federal Reserve estimates that securities-based loans outstanding across the US ranged between $104 billion and $160.4 billion over the period from Q3 2018 to Q2 2023, hitting a peak of $174.7 billion in the third quarter of 2022. As of the first quarter of 2024, the researchers found that securities-based loans amounted to $138 billion.

To provide a comprehensive set of solutions for advisors to address client needs, Saravanan says it became necessary for TIAA to partner with a provider who can deliver the solution in a digital way.

"The initial experience [with The Bancorp] is pretty sleek, their customer experience is superior, and they do provide competitive rates," Saravanan says. 

Like other SBLOC programs, the eligible securities for The Bancorp's offering run the gamut from individual securities to mutual funds, ETFs, fixed income investments, Treasurys, and even cash. The Bancorp offers a minimum $75,000 securities-backed credit line, which means to stay within the 50% loan-to-value ratio generally required for eligibility, clients must have at least $150,000 in investable assets within a taxable account.

"The loan-to-value ratio varies by the security type. If hypothetically speaking, you have $150,000 in Google stock, you can get a loan of $75,000 [through The Bancorp program]," he says. "If it's all cash, it's not that risky, so partner firms are willing to lend a little bit more." 

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Beyond their loan-to-value requirements, Saravanan says The Bancorp has the ability to monitor accounts daily, which helps ensure that clients are not taking outsized risk as they take on securities-backed credit lines.

Saravanan describes TIAA's SBLOC offering as "a great fit for clients who are looking for liquidity without liquidation," which typically include high-net-worth clients, business owners, or clients with concentrated stock positions that they don't want to sell and incur capital gains tax on. Beyond that, he sees demand from clients who have short-term liquidity needs, such as making a downpayment on a second home.

"This is a good tool for advisors who are looking to serve high-net-worth customers ... and are looking to deepen the relationship with their clients, who could help them both on the asset side as well as on the liability side," he says.

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Across TIAA's staff of roughly 700 advisors, Saravanan says the SBLOC offering will be available to the ones working with its wealth customers. He emphasized that those advisors will not be presenting it as a recommendation, but only an option, and they will go through training to understand the SBLOC offering before they're able to refer it clients as potential fit for their particular circumstances.

"All this is to help the clients and give them optionality," he says. "It's up to the clients to choose what to do."

While debt is generally a sensitive topic to bring up, Saravanan says the best advisors are able to weave it into their planning conversations. And like with any good financial discussion, he recommends leading with how existing or new debt could support the client's goals.

"They should frame the debt as part of a balance sheet. When you do financial planning, you ask for the customer's cash flow, investments, their net worth, and their liability. And that debt becomes part of the liability," he says. "So the question would be around what's the tradeoff? What's the cost of the debt? And is it worth it to keep that debt, or do we use the investments to pay it off?"