As the role of financial advisors evolves beyond pure investment management to increasingly holistic financial planning, solutions like SBLOCs have grown in popularity by allowing advisors to expand their guidance and offerings and deliver potential benefits to clients and advisors alike.
A securities-backed line of credit (also referred to as portfolio financing or securities-based lending) is a line of credit that uses a client’s non-qualified (non-retirement) investment assets as collateral. An SBLOC is a non-purpose loan, which means the funds can be used for any personal expenses, except for purchasing other securities. (Purchasing other securities would require a margin loan.)
Some investors find SBLOCs particularly attractive during market downturns. Rather than sell when stocks are low, investors gain the liquidity they want while holding on to securities until the slump is over and stock prices increase again. Because of the flexibility of SBLOCs, there are myriad possibilities for clients to attain the liquidity they need without selling securities and paying capital gains taxes. Here are a few of the situations in which clients may look to SBLOCs for funds.
Every day advisors face the conundrum of clients who want to sell securities, potentially disrupting their investment strategy to help them realize a long-held dream—a real estate purchase or home renovation, capital to fund a potential start-up business or rental property, or even a celebration like a wedding.
Liquidating investments to fund short-term goals can have negative impacts on long-term investment goals, and possibly subject the client to unnecessary capital gains taxes. By borrowing via an SBLOC, clients don’t need to sell securities that are performing well, nor impact their long-term investment strategy.
That can be a win-win for advisors, especially in the challenging position of helping clients navigate short-term versus long-term goals.
While many businesses take a strategic approach to their debt—managing it in total, so they receive the best terms from lenders or creditors—many individuals do not take this track. It’s very common for households to accrue debt at often high interest rates from convenient lenders (e.g., credit cards, car loans, home equity lines of credit (HELOCs), etc.)
Because SBLOC rates are generally competitive with other forms of consumer credit—and rates typically improve based on the size of the line—helping clients evaluate outstanding debt and terms may open up possibilities for them to consolidate under their SBLOC at better terms, potentially freeing up cashflow for them in the short term.
Some clients find comfort in having an approved SBLOC ready for unexpected financial emergencies, whether for medical needs or sudden income declines.
Having access to liquidity when an emergency arises can help clients sidestep the worst or minimize the impact of such events. Unfortunately, emergencies often appear at the most inopportune times, and selling investments to access liquidity can put a client’s long-term investment objectives at risk.
As their financial guide, advisors are in an opportune position to help clients see the wisdom of opening an SBLOC when things are going well. Even if they never tap into the line, it’s there if they need it. Plus, if they do face an unwelcome change in circumstances, the liquidity provided by an SBLOC can help them navigate the challenge without the impact that selling securities may have.
Let’s take a look at how adding an SBLOC solution to consultations might benefit an advisory practice. When it comes to SBLOCs, there are three main potential benefits for advisors.
Adding this solution provides a financial wellness approach that’s attractive to HNW and the emerging affluent client segments. As Cerulli notes, remaining competitive “requires advisory firms to move beyond investment management and provide a more comprehensive and personalized advisory solution across a given client’s balance sheet.”
Additionally, if advisors are seeking to bring on clients who already make use of SBLOCs, offering this solution becomes critical to transferring the clients’ assets to their practice.
A great way to increase the “stickiness” of client assets is to deepen relationships with them by providing guidance beyond traditional investment advice and solutions that support that guidance.
Approaching clients about the benefits of opening an SBLOC—even if they don’t draw against the line—is an easy way to accomplish that.
If advisors already provide in-depth financial planning to their clients, having an SBLOC provides greater flexibility in meeting current client needs while minimizing potential impacts to long-term financial goals.
According to financial experts, 80% of Americans carry some form of consumer debt, with an average debt of approximately $38,000 (not including mortgage debt).
The question then is not so much “Do clients make use of debt?”, but rather “From whom are they accessing it?”
Most larger financial institutions use the application process to identify client assets—assets they then pursue through other divisions of the institution, such as their wealth management or brokerage arms.
Offering clients access to the liquidity they need is a way for independent financial advisors to avoid some competitive risk.
If you’re ready to meet client liquidity needs and expand your service offerings, AssetMark can help.
For complete details on how SBLOC can help you and your clients, download the Liquidity Solutions for Investors flyer.
Want more information? Contact your AssetMark Consultant or connect with us here.
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AssetMark, Inc. ("AssetMark") is a leading provider of extensive wealth management and technology solutions that help financial advisors meet the ever-changing needs of their clients and businesses. The information on this website is for informational purposes only and is intended as an overview of the services offered to financial advisors, not a solicitation for investment. Information has been drawn from sources believed to be reliable, but its accuracy is not guaranteed and is subject to change.
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