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Use your portfolio to borrow

August 17, 2014

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. 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.

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.

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. 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.

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, shows that 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.

There 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.

This column was provided by Samuel Zimmerman, a financial adviser with Morgan Stanley Smith Barney LLC in Gloversville. The Leader-Herald invites area financial advisers to submit columns. For information on how to submit one, call Tim Fonda, managing editor, at 725-8616, Ext. 277.



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