March 15, 2018
One of the most compelling options a bank can offer its wealth clients is leverage: lending money to invest.
“You don’t want to be overleveraged in any way, shape or form, but leverage in moderation can be a really powerful tool,” says David Crittendon, Private Banking Managing Director for U.S. Bank Private Wealth Management.
According to Crittendon and David Mook, Chief Private Banking Officer for U.S. Bank Private Wealth Management, three types of debt in particular can help high net worth families achieve their financial goals: liquid asset secured financing, estate planning debt and home debt. Here’s how you can make the most of each.
1. Liquid Asset Secured Financing: A HELOC for Your Portfolio
A liquid asset secured line of credit is like a home equity line of credit (HELOC), except your marketable securities secure the loan instead of a home.
Crittendon says these lines typically have low interest rates because they’re low-risk — because the stocks are traded on an exchange, the bank knows exactly what the value of the collateral is at any given time.
Mook says clients often use liquid asset secured financing to generate cash flow quickly. For instance, at tax time, “If you’re not holding cash, you can liquidate investments and pay the tax bill or you can borrow against your portfolio,” Mook says, noting that liquidating investments may trigger capital gains taxes.
Crittendon says individuals with a higher risk tolerance can use liquid asset financing to possibly take advantage of interest rate arbitrage opportunities for funding investments they feel can generate a high rate of return.