Debt. It has a terrible reputation. And it’s often a four-letter-word for clients and financial professionals alike. Perhaps that’s why most clients work so hard to become debt-free—as well as why you may be loath to recommend to clients that they borrow money to help finance their important wealth management goals.
Yet a simple and undeniable fact remains: debt is a part of most American’s lives. Indeed, the following table from “Consumer Debt: A Primer,” courtesy of the Aspen Institute of Financial Security Program shows that, statistically speaking, the more your clients earn, the more they are likely to be currently borrowing.
Median value of debt holdings by income, thousands of 2016 dollars1
|Percentile of income||Any debt||Primary mortgage||Installment loans||Credit card balances||Other nonmortgage debt|
|Less than 20||10,350||50,000||10,000||800||3,270|
As an investment professional, you take great care in helping manage your clients’ assets. But for your clients who have non-mortgage debt, failure to help them address the liabilities-side of their personal balance sheet means you cannot truly provide a holistic approach to financial services, nor can you truly say you offer comprehensive wealth management.
Plus, if you are not helping them manage their debt efficiently, your business with them may be vulnerable to another advisor or banker who comes along and offers them a different way to borrow. For all these reasons, it may be time to think differently about debt and borrowing.
Strategic liquidity to help build and preserve your clients’ wealth
Not all types of debt are the bad kind, like the higher interest loans your clients may have that can be a drag financially. There are also good kinds of debt, like loans for college or a home your clients can afford—things that are an investment and contribute to their personal and financial wellbeing.
Securities-based lending, such as a line of credit secured by eligible portfolio assets, is an example of a potentially good kind of debt. And used strategically as a liquidity solution, it can be a practical and integral part of your overall wealth planning process.
By taking time to understand your clients’ debt profile, you can provide better investment recommendations and better-informed financial advice. Then, making an asset-based loan available to them provides one tool that can serve many purposes. It could be used to help your clients:
- prepare for the unexpected,
- seize timely investment opportunities,
- increase return potential and/or make money on the money they borrow,
- finance expensive items/assets (such as real estate) for competitive rates,
- gain negotiating power on major purchases by offering “cash in hand,”
- consolidate higher-interest debt at a more favorable rate,
- diversify concentrated stock positions,
- invest in businesses or other opportunities to create income, and/or
- manage tax liabilities or create tax-advantaged income.
It may sound counterintuitive, but you can even use strategic debt practices to help reduce your clients’ overall risk exposure. And your clients can gain portfolio liquidity to accomplish all of these goals without selling securities. This may allow client assets to continue working toward their long-term investment goals.
Strategic liquidity to help build and preserve your own business
Offering strategic liquidity solutions can be equally beneficial to your business. Credit can help you gather net new assets from clients, because clients pledge $2 in assets for every $1 in credit (on average), which means they may be more interested in consolidating their investment business with you.
Credit also makes it harder for a client to move their investment portfolio to a competitor. Clients who borrow are frequently more profitable for you than clients who do not. And by refinancing client debt, you may lower their overall cost of borrowing, freeing up funds that could potentially be re-invested into their portfolio.
In addition, credit can play a central role in future client relationships after lines are open. Every time clients have an important purchase decision, they will ask you if the portfolio or the line should be the source of funding. This allows you to act as Chief Financial Officer for your clients – which may help you become their number one, go-to professional for all their financial needs.
In many ways, paying attention to the liabilities side of your clients’ personal balance sheets is your opportunity to differentiate yourself, offer a competitive advantage and create client interest (through debt reduction and greater simplicity with one loan to manage).
RBC Correspondent and Advisor Services can make a fast and easy-to-use line of credit available to help clients take advantage of the benefits offered by securities-based lending.
A few words of caution
Like all investing decisions, there are risks associated with strategic debt practices. For example, the loan provider will require that the value of the assets stay above a certain level. Should the asset value fall beneath the stated level, the lender may require that more assets or money be deposited. Otherwise, the lender may have the authority to sell pledged assets at its discretion to satisfy some or all of the loan amount. This may lead to taxes and fees which the client will be responsible for paying.
Be sure you understand these and other risks and consider making a loan repayment plan a part of any discussion with clients regarding securities-based lending.
- “Consumer Debt: A Primer,” courtesy of the Aspen Institute of Financial Security Program Retrieved from https://assets.aspeninstitute.org/content/uploads/2018/03/ASPEN_ConsumerDebt_06B.pdf
Securities-based lending involve special risks and may not be suitable for all investors. Investors must maintain sufficient collateral to support outstanding loans. Before using such products, investors should read the Margin Disclosure Statement or line of credit literature and regulatory disclosures to ensure the risks involved are understood.
Lending services are offered by different entities to investors served by financial advisors and firms who do business with RBC Advisor Services. The financial advisor and/or firm may receive compensation in conjunction with offering or referring these services.
RBC Advisor Services is not a bank. Where appropriate RBC Capital Markets, LLC, has entered into agreements with affiliated banks to help facilitate and service lines of credit. RBC Capital Markets, LLC and its affiliates and their employees do not provide tax or legal advice. All decisions regarding the tax or legal implications of investments should be made in connection with an independent tax or legal advisor.