Unlock the Value of Your Portfolio with Securities Based Lending

By: Jan Paul C. Ferrer

 

How you borrow is an important aspect of maintaining your wealth and achieving your overall financial objectives. When executed properly, a securities based loan can provide the financing you need without liquidating assets, diminishing cash reserves or disrupting your overall investment strategy. There are risks associated with using your assets as collateral in a securities based loan, including for example (i) the need to deposit additional eligible securities to maintain the availability of funds and (ii) possible margin calls on short notice. See below for details.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 eligible 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 remains 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 can 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.

A securities based loan 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 approved, 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 costeffective solution3.

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 can reduce the chance of having an imbalance in asset allocation.4 In this way, securities based lending can align 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. Please contact us to learn more about securities based loans in addition to other lending solutions that may be available to meet your financing needs.

Footnotes

1 Borrowing against securities may not be suitable for everyone. Please be aware that securities based loans involve a high degree of risk and that market conditions can magnify any potential for loss. Most importantly, please 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 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 Bank, N.A., Morgan Stanley Private Bank, National Association or Morgan Stanley Smith Barney LLC (collectively referred to as “Morgan Stanley”) 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) Morgan Stanley reserves the right to increase your collateral maintenance requirements at any time without notice; and

(6) Morgan Stanley reserves the right to call securities based loans at any time and for any reason.

The proceeds from certain securities based loan products may not be used to purchase, trade, or carry margin stock (or securities, with respect to Express CreditLine); repay margin debt that was used to purchase, trade or carry margin stock (or securities, with respect to Express CreditLine); and cannot be deposited into a Morgan Stanley Smith Barney LLC or other brokerage account.

2 Morgan Stanley Smith Barney LLC (”Morgan Stanley”), its affiliates, employees and Morgan Stanley Financial Advisors are not in the business of providing tax or legal advice, and these materials and any statements contained herein should not be construed as tax or legal advice. This material was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Individuals should consult their personal tax advisor or attorney for matters involving taxation and tax planning and their attorney for matters involving personal trusts and estate planning.

3 No application or origination fee charged by Morgan Stanley. In certain instances, borrowers will be required to pay legal or documentation fees to third parties. Clients may be charged a fee for the issuance of a letter of credit in connection with certain securities based loan products.

4 Asset allocation does not assure a profit or protect against loss in declining financial markets.

The contents of this document should not be construed as a commitment to lend.

Morgan Stanley is a registered Broker/Dealer, a member SIPC, and not a bank. Where appropriate, Morgan Stanley has entered into arrangements with banks and other third parties to assist in offering certain banking related products and services. Unless specifically disclosed in writing, investments and services offered through Morgan Stanley are not insured by the FDIC, are not deposits or other obligations of, or guaranteed by, a bank and involve investment risks, including possible loss of principal amount invested.

If you’d like to learn more, please contact Jan Paul Ferrer.

Article by Wealth Management Systems, Inc. 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 Via Times to feature this article.

[Jan Paul Ferrer may only transact business in states where he is registered or excluded or exempted from registration [http://www.morganstanleyfa.com/ferre r. 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 Jan Paul Ferrer is not registered or excluded or exempt from registration. © 2014 Morgan Stanley Smith Barney LLC. Member SIPC.