MARKETS & INVESTING
Your portfolio can be the key to managing cash and maintaining flexibility.
Today’s financial gurus seem to share a golden rule: You should aggressively pay down debt and live without it. This is sage advice for many, but not everyone. If you have substantial wealth, strategically borrowing can help you come out on top – even with rising interest rates.
So if you haven’t implemented a borrowing strategy within your financial plan, now might be the time to consider one.
Why wealthy investors borrow
Certain lending solutions can allow you to keep your assets invested (and growing) while providing access to liquidity. That’s particularly important because time in the market is a key to long-term portfolio growth and success.
A line of credit is often an inexpensive way to get cash when you need it. It can also enable executives to monetize stock ownership without incurring capital gains or reducing ownership in their company.
Overall, debt can be a useful tool to fuel your wealth engines if it comes cheaply enough relative to other opportunities, keeps your assets working for you and, above all, if the risks are understood and tolerable. That’s essential. You need to truly understand whether debt can help you take a balanced approach to liquidity without disrupting your investments, retirement plans or lifestyle.
Using debt to lower taxes
Debt can be used as a savvy tax strategy, particularly if your income comes in nontraditional forms, such as shares in a company you founded. That’s because interest on a loan is often lower than what you might pay in capital gains taxes from selling shares.
By borrowing against your shares, you can continue enjoying your lifestyle without liquidating wealth. This is also key for short-term, immediate liquidity events where selling assets and incurring capital gains taxes may end up costing you more in the long run.
You can also borrow to fund tax-advantaged, appreciating assets. Take real estate as an example. Since mortgage debt interest is tax deductible up to a certain amount, the savings in taxes on a significant mortgage could be larger than the mortgage interest. Plus, in higher rate environments, structuring debt may have a positive impact on your borrowing rate.
Simply put, even in a rising interest rate environment, the cost of borrowing can be lower than the cost of selling an asset when you have collateral.
Three types of collateralized debt
Asset-backed loans can provide access to liquidity while enabling the underlying asset to continue growing. If this sounds enticing, consider the following options:
Securities based lines of credit (SBLs) – Leverage your existing assets as collateral to access capital quickly, at a relatively low interest rate and without disrupting your asset allocation.
Structured lending – This customized credit solution gives you access to liquidity, allowing you to optimize cash flow, seize opportunities and realize estate planning goals – all without disrupting your long-term financial strategies. Assets leveraged as collateral are also typically illiquid, concentrated or exotic, meaning they’re difficult to value or sell.
Pledged asset mortgage – Through this specialized option, you can finance up to 100% of the purchase price of your home using eligible securities as collateral in lieu of a down payment or equity position. This also allows you to keep securities invested and avoid potential capital gains taxes that come with liquidating assets for real estate transactions.
A special wrench for your financial toolbox
At the intersection of taxes, investments, family budgets, surprises and everything else, figuring out when it’s best to strategically borrow or when to just pay cash can be a complicated question. Luckily, this isn’t a unique question, and your financial advisor may have tools to help.
The underlying idea of using your portfolio for relatively low-interest borrowing ties into another piece of age-old financial advice: Make your money work for you. With a collateralized loan, in a way, you’re just giving it a second job.
This is for informational purposes and is not intended to be tax advice. Please consult with a tax advisor for specific questions regarding qualified expenses.
A securities based line of credit (SBLC) may not be suitable for all clients. Borrowing on securities-based lending products and using securities as collateral may involve a high degree of risk, including unintended tax consequences and the possible need to sell your holdings, which may lead to a significant impact on long-term investment goals. Market conditions can magnify any potential for loss. If the market turns against the client, he or she may be required to quickly deposit additional securities and/or cash in the account(s) or pay down the loan to avoid liquidation. The securities in the pledged account(s) may be sold to meet the collateral call, and the firm can sell the client's securities without contacting them.