From The Desk Of is a series that profiles real advisors solving problems for their clients using GS Select.
Carrie Calloway has more than 10 years of experience in private banking and working with financial advisors. Prior to joining Goldman Sachs in 2017 as a Regional Lending Manager, she held positions at Morgan Stanley and Merrill Lynch in the private wealth and banking groups.
David Esser is a veteran financial strategist with over 30 years of experience collaborating with financial advisors in developing customized client solutions that meet their wealth and liquidity needs. Prior to joining Goldman Sachs as a Regional Lending Manager, David was part of the BNY Mellon Private Bank in a strategic position in the creation of the BYNM Private Bank - Independent Channel.
Q. What are securities-based lines of credit (SBLOCs)?
A. Carrie: Most simply, SBLOCs are loans. They are collateralized by non-retirement securities that are invested in the market. The proceeds can be used for any purpose other than purchasing, trading or carrying stock. Many of our borrowers use the liquidity for real estate purposes, investing in a business, college tuition, or to address the expected and unexpected liquidity needs that pop up from time to time. And, an SBLOC is a revolving line of credit, so a borrower can pay it down and use it again when needed.
Q. How do you define “liquidity management?”
A. David: The strategic word here is “management.” Pro-actively managing client liquidity needs has a direct impact on the savings and investment plan being able to achieve its growth objectives.
Q. So how do advisors elevate the dialogue with their clients and build flexibility into their financial plan?
A. Pat: GS Select has been a leader in this space by addressing this exact point. For clients, a revolving line of credit secured by their assets can allow them greater flexibility to borrow when needed. We consider GS Select a practice management tool that can help advisors deepen the relationships with their clients by solving a need and retaining their assets. They can also use GS Select to compete and win new business.
Q. Why is incorporating liquidity management an important tool for advisors and clients?
A. Carrie: Not all needs for cash require liquidation of assets. Liquidation can often incur some kind of lost opportunity and potential tax liability. Using an SBLOC can allow a client to address their need for cash and keep their investment strategy intact, with rates that can be competitive against other loan types.
Q. When is it best to position SBLOCs as a possible liquidity solution?
A. David: An SBLOC can be established at any time. With a GS Select SBLOC, the whole process is generally no more than several days depending on the complexity of the request. These facilities can be set up when the client relationship is established or in advance of an upcoming need, like the closing on a home purchase or an anticipated tax bill. They can, however, also be set up to address the unexpected.
In general, an SBLOC makes sense when the client’s expected investment portfolio returns (market growth + interest and dividends), plus the sum of costs avoided by not selling positions in their portfolio (the expected tax liability and transaction costs), is greater than the cost of borrowing.
Q. What are some of the indications that access to liquidity will become important to your clients?
A. Carrie: Often, a need for extra cash coincides with the client’s pending life events like a growing family, college tuition and expenses, downsizing and retirement. Additionally, any client that is an active investor in real estate or private businesses is often a good candidate for an SBLOC, since significant amounts of capital are needed under tight timelines.
Q. How are SBLOCs priced?
A. David: SBLOCs are generally priced using a variable rate that is based on different indexes, including LIBOR, Fed Funds, Broker Call, or Prime Rate. LIBOR plus a spread is most typical pricing structure.
Q. Are the collateralized assets frozen?
A. David: No. The account can continue to be managed. The primary consideration is to ensure that the pledged collateral is of sufficient value to support the loan amount outstanding. I always recommend to my clients that are considering SBLOCs to have excess collateral available in the event of a maintenance call.
Q. So, what are other risks are there?
A. Carrie: In addition to market movement, there are a few other things to watch for to ensure a healthy borrowing experience. For example, the assets in the pledge account cannot be removed without approval from the lender. While the funds can be used for almost any cash need, they cannot be used to purchase other securities. Check writing, debit/credit cards, ACH, margin, will also be disabled in the pledged account. Retirement accounts cannot be used as pledge accounts and certain types of securities such as derivatives, options, and penny stocks generally cannot be held in a pledged account. There are usually initial first funding amount requirements as well as subsequent minimum funding requirements. For example, the minimum funding amount is $2,500 with a GS Select SBLOC.
Q. When does it make sense to borrow versus selling for a liquidity or capital need?
A. David: There are personal as well as financial considerations to be deliberated. These considerations include the client’s knowledge of market conditions and risks and their plans for managing the debt – for example, will the client pay monthly interest payments or will they pay it off in whole?
Financially, when the cost of borrowing is more than the expected market rate of return, or when circumstances do not provide a clear and reasonable source of repayment – borrowing may not be the most viable solution. However, there are many scenarios when borrowing makes economic sense.
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