Individuals with unexpected or urgent expenses rely on their financial advisors to provide a variety of options to solve their short-term capital needs.
One option that should be a part of any financial advisor’s playbook is collateralized loans, which can provide liquidity without hindering a client’s long-term financial strategy or requiring a liquidation of assets. A collateralized or securities-backed loan allows clients to utilize securities, cash and other assets in taxable or eligible brokerage accounts as collateral to obtain variable or fixed-rate loans.
Unlike margin loans, collateralized loans may not be used to purchase securities or retire margin debt and typically have higher advance ratios, which allows for greater cash advances. This infusion of capital can then be used for certain short-term, time-sensitive expenses, such as funding a business venture or life event, purchasing real estate or consolidating debt.
For financial advisors considering recommending collateralized loans as a timely alternative that won’t disrupt their client’s long-term financial plans, here are a few things to keep in mind:
Benefits of a Collateralized Loan
Timeliness is a main advantages of a collateralized loan. Because collateralized loans are backed by tangible financial assets, many applicants don’t have to wait long to receive a decision from a bank. This is in stark contrast to an ordinary loan, which generally requires a lengthy application and approval process, especially for large capital requests. All loans are subject to credit approval and eligibility of assets.
Collateralized loans also are ideal for clients who have significant investments that, if sold prematurely to meet an immediate need, would incur short-term capital gains taxes. While the tax consequences of selling an asset within one year aren’t as significant following the recent tax reform, abruptly exiting an investment can negatively affect a long-term strategy. At the same time, liquidating an asset eliminates any potential for appreciation of that asset in favorable economic conditions.