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.

Is a Collateralized Loan Right for Your Client?

Even when clients have an immediate need for cash, advisors must consider several factors before suggesting a collateralized loan. Advisors should consider a client’s long-term financial strategy, time horizon and ability to assume additional debt when thinking about a securities-based loan.

A client’s risk tolerance and the specific terms of the loan also are critically important. For instance, some lenders may charge fixed or variable rates slightly above market average, while others may offer a range of terms and conditions based on the diversification and holding of each client’s portfolio. These varying terms can have a tremendous impact on the viability of a collateralized loan for a particular client.

Likewise, advisors must understand a client’s risk appetite. If the collateralized securities decrease in value below the contract threshold over the course of the loan, borrowers may have to pay down the difference, deposit more collateral or sell the holdings altogether. In the event of liquidation, clients will not be able to choose which assets a lender sells; liquidation may result in negative tax implications and impacts to the client’s long-term strategy.

Familiarize Yourself With Collateralized Loans

In today’s environment, clients expect their financial advisors to provide a wide array of suggestions on both sides of the balance sheet. As more advisors strive to provide clients with timely advice and long-term planning, having access to options for wealth preservation and wealth management can help you assist clients in making decisions that forward their goals and ultimately deepen your relationship.

A service-oriented approach that provides clients with thoughtful consideration and guidance establishes you as a forward-thinking and proactive advisor — traits that today’s investor appreciates and needs.


Bryan Loew is head of Wealth Lending Sales, TD Wealth.