When buying luxuries, your portfolio can be powerful collateral.
You’ve got a smart portfolio, a balanced cash management strategy and a tax plan tied with a bow, but then a bucket list opportunity appears. It could be a family vacation of a lifetime, an heirloom piece of jewelry, a club membership, a boat, a plane or even a 1930 Cord L-29 Cabriolet.
If you have the means to consider those kinds of expenditures, you probably have options, but some options may be more disruptive than others.
Selling securities can disrupt your well-structured portfolio, an opportunity cost, and may trigger capital gains taxes. You may have cash on hand, but a finely tuned cash management strategy is not typically meant to absorb these kinds of large costs. For boats, planes and classic cars, there are niche lenders, but the verification process can be lengthy and intrusive. This is particularly true if working outside a financial institution in which you already do business.
A more suitable option may be securities-based lending.
Securities-based lending – or SBL, as it is commonly marketed – uses your investment account as collateral on a line of credit, enabling you to quickly finance a large purchase. The investment account is hypothecated – pledged – much like when a home is financed by a mortgage, with the credit limit bound in part by the value of the account and the lender’s policies.
A securities-based line of credit can be created ahead of time, just in case, but even if created in response to an immediate opportunity, verification may be completed within days – and often the same day if you have an existing relationship with the broker-dealer.
Once it’s created, drawing from a securities-based line of credit can be completed quickly, with some lenders offering a simple e-signature process to wire the funds. No closing costs. No origination fees.
And with that, your purchase is made. Enjoy!
As with other lines of credit, you will begin making payments on the balance according to the terms. This is where a relationship with a financial advisor can be beneficial, allowing you to plan a strategy to pay back the loan with minimal disruption to your financial plan. Common strategies include:
Securities-based lending is not without its particular risks. Since interest rates are variable – based on a reference rate like the Secured Overnight Financing Rate (SOFR) – many borrowers treat them as short-term loans and plan to pay them off within 12 to 18 months.
There is also market risk to consider. Since the value of the collateral is as variable as the market, a loss in portfolio value could trigger a collateral call. If that happens, the borrower will need to assign additional collateral to the account or pay down part of the balance, or the lender can close the gap by selling securities from the account on the open market.
Lenders may try to avoid the need for any of these corrections by following conservative lending policies, as collateral calls can leave a sour taste. And if the borrower were to default, the lender can sell securities then to pay the debt.
As securities-based lending is collateralized with generally liquid assets, interest rates can be very appealing, particularly at larger account sizes. This has made securities-based loans particularly popular for well-invested individuals who enjoy the occasional serendipitous, good-life purchase, as well as those looking to add a buffer to their cash strategy.
As they say, it’s a tool in the toolkit, and it may have its moment the next time that original Tiffany lamp shows up on offer.
A Securities Based Line of Credit (SBLC) may not be suitable for all clients. The proceeds from an SBLC cannot be (a) used to purchase or carry securities; (b) deposited into a Raymond James investment or trust account; (c) used to purchase any product issued or brokered through an affiliate of Raymond James, including insurance; or (d) otherwise used for the benefit of, or transferred to, an affiliate of Raymond James. Raymond James Bank does not accept RJF stock or any securities issued by affiliates of Raymond James Financial as pledged securities towards an SBLC. Borrowing on securities based lending products and using securities as collateral may involve a high degree of risk including unintended tax consequences and the possible need to sell your holdings, which may lead to a significant impact on long-term investment goals. Market conditions can magnify any potential for loss. If the market turns against the client, he or she may be required to quickly deposit additional securities and/or cash in the account(s) or pay down the loan to avoid liquidation. The securities in the Pledged Account(s) may be sold to meet the Collateral Call, and the firm can sell the client’s securities without contacting them. A client is not entitled to choose which securities or other assets in his or her account are liquidated or sold to meet a Collateral Call. The firm can increase its maintenance requirements at any time and is not required to provide a client advance written notice. A client is not entitled to an extension of time on a Collateral Call. Increased interest rates could also affect SOFR rates (or any successor rate thereto) that apply to your SBLC causing the cost of the credit line to increase significantly. The interest rates charged are determined by the market value of pledged assets and the net value of the client’s non-pledged Capital Access account.
Securities Based Line of Credit provided by Raymond James Bank. Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. are affiliated with Raymond James Bank, member FDIC.
