Collateral loans are all too often being overlooked and underutilized by RIAs despite being one more effective financial tool they have to select from, according to the findings of a recent TD Bank survey.
The survey’s responses revealed a discrepancy between understanding the capabilities of collateralized loans and the actual use and offering of those loans to clients, the company said Tuesday.
Although collateral lending, also known as securities-based lending, benefits clients and firms, it remains an “enigma” among many RIAs, according to the survey’s findings.
Forty-six percent of RIAs agreed that the main benefit of collateral lending for their firms would be the value added to the client, the survey found. However, only 24% of RIAs are ultimately implementing collateral lending as a part of their firms’ client offerings, TD Bank said.
Collateral lending presents a potential opportunity for RIAs and their firms to offer this “relatively untapped solution that could ultimately help them retain existing clients, while also attracting a new client base,” according to TD Bank.
The Potential Negatives
However, collateral lending is not for all investors, and RIAs must have conversations with their clients before steering them toward these investments.
“While collateral lending remains an excellent solution to help clients solve their liquidity needs, in times of volatility, it is especially important that advisors clearly understand and explain all the risk of collateral lending to their clients,” Bryan Loew, head of Wealth Lending Sales at TD Bank, told ThinkAdvisor.
And there are several potential risks. For one thing, he explained Wednesday: “A decline in the value of the collateral assets may require your client to provide additional funds or securities to avoid a collateral maintenance call.” The client can also end up losing more funds than are held in the collateral account, he noted.
In addition, a bank “can force the sale or other liquidation of any securities or other investment property in the collateral account and can do so without first contacting” the advisor or the client, he said.