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A Lending Tool Most RIAs Overlook

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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.

Also: Neither the advisor or client should expect to choose which securities in the collateral account are liquidated or sold; the bank may change its collateral maintenance requirement at any time without notice to the advisor or client; the client may not be entitled to an extension of time to satisfy the bank’s collateral maintenance requirement; there could be “adverse tax or other consequences to your client if securities are sold or otherwise liquidated”; and “financing real estate with a securities-based loan or line of credit carries risk and may not be appropriate for your client’s needs,” he warned.

Other Survey Findings

The survey was conducted Jan. 29-30 at TD Ameritrade’s National LINC 2020 conference in Orlando, Florida, in January. The total sample included 101 survey respondents consisting of RIAs who attended the conference, TD Bank said.

“If we were to conduct this same survey today, while risk tolerance ranked in line with interest rates as one of the most important things to consider when applying for a collateral loan, I would anticipate that risk tolerance would surge ahead given the recent market volatility,” Loew conceded.

Interest rates were cited by 30% of respondents as the most important thing to consider, just ahead of risk tolerance (29%). Trailing were underwriting requirements (21%), the financing timeline (13%) and capital gains/tax considerations (8%).

When it comes to lending, 36% of respondents pointed to increased consolidation as the biggest concern for the industry, followed by digital processes and implementation (30%), delivering unique products (23%) and artificial intelligence (12%), TD Bank said.

An overwhelming majority of respondents (64%) said they did not offer collateral lending as part of their practices, while another 10% said they were “unsure” if collateral lending was even offered by their RIA firm, TD Bank said. What’s more, 3% of respondents said their practices weren’t currently leveraging collateral lending but planned to use this offering starting at some point this year.

Twenty-two percent of respondents said this lending solution helps attract new assets to their firms, while another 19% said it helped their firms retain assets and 13% indicated the main benefit of collateral lending to their firms was customer service.

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