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Unlock The Value of Your Portfolio With Securities-Based Lending

How you borrow is an important aspect of maintaining your wealth and achieving your overall financial objectives. When executed properly, securities-based lending can provide the financing you need without liquidating assets, diminishing cash reserves or disrupting your overall investment strategy.1 

As you pursue your passions–such as delving into a business opportunity or purchasing a vacation home–you are faced with multiple financing options. How you choose to borrow is important to meet your immediate need for liquidity as well as maintain your long-term wealth management strategy.

Liquidating an investment account can be part of that plan, but there are potential hidden costs in doing so such as taxes on capital gains.2 Two other considerations include the potential loss of future asset growth, also known as opportunity cost, and the possibility of creating an imbalance in your portfolio’s overall asset allocation.

When the time comes–or when an opportunity arises–an alternate financing strategy may offer a more practical approach: securities-based lending.

For those of you who are not familiar with securities-based lending, it is a form of lending that enables you to use the eligible securities in your brokerage account as collateral for a loan or a line of credit. As long as eligible collateral remain and an adequate value of such collateral is maintained, a securities-based loan can create the liquidity you need to take advantage of a present opportunity or meet an immediate need without liquidating assets, diminishing cash reserves or disrupting your overall investment strategy.

By establishing a securities-based loan, you gain quick and efficient access to funds that may enable you to achieve a number of objectives.

•            Explore small-business opportunities.
•            Purchase luxury items.
•            Finance real estate.
•            Pay taxes.2
•            Fund higher education.
•            Finance a bridge loan.
•            Meet general liquidity needs.

Securities-based lending offers many benefits that may not be available through traditional loans. The process is relatively simple, in part, because the collateral is liquid and readily accessed via your investment account. Once established, you can make withdrawals by simply writing a check or wiring funds when needed. With no origination, maintenance or facility fees, securities-based loans may be a cost-effective solution.

Interest rates on securities-based loans can be lower than alternatives such as mortgages and home-equity lines of credit.4

Because your investments are not liquidated, as long as the required level of collateral is maintained, securities-based lending preserves the potential for growth of your investments and reduces the chances of having an imbalance in asset allocation.3 In this way, securities-based lending aligns with your overall wealth management objectives by enabling you to unlock the value of your portfolio to meet short-term financing needs, while keeping your longer-term wealth management strategy intact.

The chart and table below illustrate a hypothetical example of how a securities-based loan can potentially buffer a portfolio based on the S&P 500 index  from the adverse effects of withdrawing $200,000 and depositing $200,000 one year later. If this investor utilized a securities-based loan to fund the $200,000 liquidity need rather than withdrawing funds from the portfolio, he could potentially have over $103,000 more (based on this time period and scenario). This scenario excludes fees, taxes and other potential deductions.

Chart_with_GWA_May_2013There are risks associated with using your assets as collateral in a securities-based loan, and doing so is not beneficial for all clients. Sufficient collateral must be maintained and you may need to deposit additional eligible securities on short notice.1

Please contact us to learn more about securities-based loans in addition to other lending solutions that might be an appropriate solution for your financing needs.

 

Courtesy of: Irene F. Stolarz, Family Wealth Director, Financial Advisor
Branch Name: Morgan Stanley, Little Falls, NJ
Phone Number: 973-890-3020
Web Address: : www.morganstanleyfa.com/stolarzChart2_with_GWA_May_2013

 

Footnotes
1 Securities-based Lending Risks:  Borrowing against securities may not be suitable for everyone.  You should be aware that securities-based loans involve a high degree of risk and that market conditions can magnify any potential for loss.  Most importantly, you need to understand that:  (1) Sufficient collateral must be maintained to support your loan(s) and to take future advances; (2) You may have to deposit additional cash or eligible securities on short notice; (3) Some or all of your securities may be sold without prior notice in order to maintain account equity at required collateral maintenance levels.  You will not be entitled to choose the securities that will be sold.  These actions may interrupt your long-term investment strategy and may result in adverse tax consequences or in additional fees being assessed; (4) Morgan Stanley Smith Barney LLC or its affiliates (the “Firm”) reserves the right not to fund any advance request due to insufficient collateral or for any other reason except for any portion of a securities-based loan that is identified as a committed facility; (5) The Firm reserves the right to increase your collateral maintenance requirements at any time without notice; and (6) The Firm reserves the right to call your securities-based loan at any time and for any reason.
2Morgan Stanley and its Financial Advisors do not offer tax advice. Individuals should consult their personal tax advisor before making any tax-related investment decisions.
3Asset allocation does not assure a profit or protect against loss in declining financial markets.
4 The Wall Street Journal, “Putting Stocks in Hock: Securities Are Backing for More Big Loans” March 4, 2013.
Morgan Stanley Smith Barney LLC is a registered Broker/Dealer, not a bank.  Where appropriate, Morgan Stanley Smith Barney LLC has entered into arrangements with banks and other third parties to assist in offering certain banking related products and services.  Banking and credit products and services are provided by Morgan Stanley Private Bank, National Association or Morgan Stanley Bank, N.A., members FDIC (the “Banks”).  The Banks and Morgan Stanley Smith Barney LLC are affiliates.  Investment products and services are offered through Morgan Stanley Smith Barney LLC, member SIPC.  Unless specifically disclosed in writing, investments and services offered through Morgan Stanley Smith Barney LLC are not insured by the FDIC, are not deposits or other obligations of, or guaranteed by, the Banks and involve investment risks, including possible loss of principal amount invested.
If you’d like to learn more, please contact Irene Stolarz.
Article by McGraw Hill and provided courtesy of Morgan Stanley Financial Advisor.
The author(s) are not employees of Morgan Stanley Smith Barney LLC (“Morgan Stanley”). The opinions expressed by the authors are solely their own and do not necessarily reflect those of Morgan Stanley.  The information and data in the article or publication has been obtained from sources outside of Morgan Stanley and Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of Morgan Stanley. Neither the information provided nor any opinion expressed constitutes a solicitation by Morgan Stanley with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned.
Morgan Stanley Financial Advisor(s) engaged The Post Eagle to feature this article.
Irene may only transact business in states where she is registered or excluded or exempted from registration www.morganstanleyfa.com/stolarz . Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Irene is not registered or excluded or exempt from registration.

© 2013 Morgan Stanley Smith Barney LLC.  Member SIPC.
CRC 644313 4/2013