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Identifying Securities-Based Lending Prospects Among Existing Clients

Advisors can gain a competitive edge by managing both the asset and liability sides of a client’s balance sheet.

There was a time when advisors practically had to shake the trees to find prospects for new strategies. Today, a combination of generational change, pandemic disruptions, and expanded relationship-building due to digital technology has turned the tables: A Broadridge survey of 1,500 wealth management clients found that 60% wanted their advisors to share a lot more ideas with them. 

Investor hunger for new opportunities ranges from a passionate interest in Environmental, Social, Governance (ESG) strategies to all things crypto on the asset side of the balance sheet. On the liability side, the search for ready liquidity has spurred advisors to unlock their inner bankers to meet clients’ lending needs as well.

One lending approach, in particular, has been gaining momentum: Securities-Based Lending (SBL) offers a way for advisors to provide a lower-cost, risk-managed source of credit to clients. With SBL, clients access funds from their highly appreciated, non-retirement investment portfolios without interrupting their underlying investment strategy or potentially triggering a tax event. SBLs also allow advisors to strengthen their relationship with clients by providing them with a fast, frictionless way to obtain the credit they need.

According to Broadridge’s 2021 Securities-Based Lending Report, more than 80% of lending leaders polled reported a strong correlation between providing SBL products and AUM growth. The reason: An SBL offering attracts new AUM balances and makes them stickier—the more you know about your client’s balance sheet, the more ownership you have of it. Adding liquidity solutions to your wealth management array, in effect, puts a sign over your clients that tells the world, “Sorry, this client is taken.”

Identifying SBL candidates. Start by identifying the credit needs, or potential needs, of your existing clients.

Wealthy empty nesters: Securities-Based Lines of Credit (SBLOCs) have been a proven credit mainstay for ultra-high-net-worth investors and high-net-worth individuals looking to expand their horizons and embrace new experiences. Specifically, those interested in new real estate purchases, securing bridge loans, undertaking a home remodeling project, buying a luxury item, or taking an exotic trip.

Ambitious entrepreneurs: Enterprising business clients with near-term plans for expansion and growth, whether it be adding capacity or marketing, could benefit from collateralizing a percentage of their highly appreciated securities to underwrite a flexible, low-cost SBLOC.

Debt consolidators: High interest-bearing debt can add up. Faced with economic uncertainty, inflation-sensitive clients could combine their debts under one SBLOC at a lower rate, accessing their appreciated assets while keeping their investment objectives on track.

Home buyers in a competitive market: In a hot property market, time and liquidity are of the essence. An SBLOC transforms your client into a cash buyer, putting them at the top of the queue for their dream home. They can put money down to ensure a quick purchase, while mortgage finance is arranged in the background. Meanwhile, you have helped your client’s dreams come true.

Tomorrow’s millionaires: The emerging mass affluent cohort represents “the potential future of HNWIs,” according to Cap Gemini’s 2020 World Wealth Report. Often overlooked, the mass affluent can be one liquidity event, inheritance, stock award or other windfall away from joining the HNWI segment themselves. Demanding access to the same products and services enjoyed by wealthier cohorts, the mass affluent are especially receptive to discussing innovative ideas with financial professionals and, for some, SBLs could be a way to consolidate and pay down debts at lower cost while keeping their long-term investment goals on track.

Emergency funders: Climate change-related disasters have been wreaking havoc over the past five years. Clients worried about flooding, wind damage, or other hazards, could use an SBLOC reserve fund to build up their rainy-day resources.

Are SBLs right for everyone? Suitable SBL clients require enough wealth to access the liquidity in their portfolios while maintaining a long-term investment perspective. They should be able to cover margin calls in the event of a downturn. As an asset-backed loan, the value in client portfolios (noting that securities held in a retirement account cannot be used as collateral) is the most important factor in determining suitability. Some firms also assess ability to repay as part of the approval process. Finally, advisors should make a complete assessment of client circumstances before recommending any lending solution.

SBLOC’s do, however, offer several safeguards. Clients can draw down less than the maximum amount available to create a buffer against a downturn. Additionally, digital monitoring provides alerts in advance of potential margin calls. Importantly, a client may be able to backstop their SBLOC by secondary credit sources like a Home Equity Line of Credit (HELOC).

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