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Leveraging Your Securities to Finance Your Short Term Cash Needs
By Mark K. W. Gim / April 24, 2017
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As seen on the WJAR NBC 10 Smart Advice Series

As an investor, you may be satisfied with your long-term plan to manage your investment assets, but could find yourself in a financial situation that requires a fast response: an opportunity to purchase real estate, an attractive but time-sensitive business transaction, or an unexpected expense that you need to meet in the short term. Securities-based lending (SBL) may be the right way to access liquidity without the tax consequences of selling investments or changing your asset allocation.

Also known as portfolio-based lending, SBL enables you to take out a loan using your investments as collateral, just as you might use a second mortgage to draw on your home equity as a source of credit. SBL can provide access to liquidity at rates of interest that are often significantly lower than a home equity line or second mortgage, while offering a greater level of flexibility for repayment.

There are both benefits and potential drawbacks to using SBL as an alternative to selling investment securities or borrowing against other types of collateral. For instance, if you liquidate an investment that's appreciated in value to obtain funds, this can trigger capital gains tax, reducing the net amount of money you realize from the sale. This tax consequence could be avoided by borrowing against investments using SBL, instead of selling them. You will continue to hold the underlying investments in accordance with your long-term financial plan rather than selling them, and they will continue to pay interest or dividends and change in value as financial markets rise or fall.

However, in periods of unexpected volatility, dramatic changes in the value of financial assets can reduce their value as SBL loan collateral. During periods of time when stock markets fall dramatically, for example, credit availability could decline unexpectedly. This is one reason why SBL is often best used to meet short-term needs until a longer-term option is available.

Keeping in mind the upside and downside of any financial strategy, securities-based lending may be an efficient and attractive solution for investors to keep in their financial tool kit, especially when used for in situations that require quick access to significant amounts of liquidity in a short time horizon.

Carefully consider whether Securities-based lending is right for you. Securities-based lending has special risks and is not suitable for all investors. There may be times when market activity causes the value of pledged securities to decline. If the value drops below required levels, you may be required to pay down your line of credit or pledge additional eligible securities. Otherwise, the firm may require the sale of some or all of the pledged securities. The sale of pledged securities may cause adverse tax consequences. Borrowing against investments is not without risks. Remember you are pledging securities whose value is impacted by events outside your control. The risks of securities-based lending may include: (1) market fluctuations that may cause the value of pledged assets to decline; (2) a decline in the value of your securities that could result in selling your securities to maintain equity; and (3) adverse tax consequences as a result of selling securities.

Contact a Washington Trust Planning Officer at 800-582-1076 or email us at to learn more about whether SBL is an option you should consider, and for more smart advice that’s focused on your unique financial goals.

The views expressed here are those of Washington Trust Wealth Management and are subject to change based on market and other conditions. Investment recommendations and opinions expressed in these reports may change without prior notice. All material has been obtained from sources believed to be reliable but its accuracy is not guaranteed. Investing entails risk, including the possible loss of principal. Stock markets and investments in individual stocks are volatile and can decline significantly in response to issuer, market, economic, political, regulatory, geopolitical, and other conditions. Fixed Income investments, including floating rate bonds, involve risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. Interest rate risk is the risk that interest rates will rise, causing bond prices to fall. Past performance does not guarantee future results. The information we provide does not constitute investment or tax advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. Please consult with a Washington Trust Planning Officer, attorney or tax professional regarding your specific investment, legal or tax situation.

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The opinions expressed in this blog are those of the author and may not reflect those of Washington Trust Wealth Management. The information in this report has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. Any opinions expressed herein are subject to change at any time without notice. Any person relying upon this information shall be solely responsible for the consequences of such reliance. Performance is historical and does not guarantee future results.

Such information does not constitute legal or professional advice as all situations are unique and are based on individual facts and circumstances.

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