The Wealthy Turn To Securities Lending For Easy, Tax-Free Money


The ultra-rich, flush with the liquidity accumulated since the start of the pandemic, have begun to finance certain purchases with “bank of me” loans that use securities as collateral.

This decision also has surprisingly few tax implications, when executed properly. Many of Wall Street’s biggest players, including giants like Goldman Sachs, Morgan Stanley and BofA Merrill Lynch, are rapidly expanding their lending businesses, gaining access to a new group of affluent investors.

Well-placed sources have said that these companies are willing to lend up to 60% or 65% of a client’s portfolio, depending on their level of risk. Morgan Stanley and Merrill lend primarily to their owner clients, although Goldman is developing significant business with RIAs and independent brokers.

“If a person has a liquid portfolio of stocks or bonds held with a broker, bank, or wire house, they can use a collateralized account loan to borrow against the portfolio and not have to sell securities for get cash, ”said Howard Sharfman, senior general manager at NFP Insurance Solutions in Chicago.

“The securities are used as collateral for the loan,” said attorney Toby Mathis, founding partner of the Anderson Law Group and director of its Las Vegas office. And “not just the ultra-rich: anyone who wants to access low-interest liquidity without incurring capital gains and, above all, giving up the growth of securities.”

Although simple in concept, these loans can get risky. A falling market could mean that a borrower has a margin call. Some also view securities lending as a conflict of interest in the broker-client relationship, potentially leading brokers and RIAs to recommend something that can be detrimental to the preservation and growth of clients’ long-term wealth.

“Using leverage of any type adds risk to the portfolio,” said Sharfman. “Customers need to think carefully before taking advantage of anything and make sure that a large drawdown in the wallet can still support the loan of the pledged account. “

“As with all borrowing strategies, the interest rate applied is based on the creditworthiness of the borrowers and the assets pledged as collateral,” Cordasco said. “It’s important to understand your risk if asset values ​​go down. “

These borrowing strategies are no different from using a home equity line of credit to access the accumulated equity in your home, said Rob Cordasco, CPA and Founder of Cordasco & Company in Savannah, Ga. .

Clients can use a wide variety of strategies to access liquidity by leveraging the assets they own without triggering taxes. “The simplest form is to ‘borrow on margin’ through your investment account or to borrow against the cash value of your life insurance policy,” Cordasco said. But understanding the terms of the loan is essential, he added.

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