Portfolio-based Credit – The good, the bad and the ugly

/, Lending, Single Point of View/Portfolio-based Credit – The good, the bad and the ugly

Groucho Marx famously said…  “I would never want to join a club that would have me as its member”

Similarly, banks love nothing more than to lend to borrowers who have no need to borrow.

And the high-net-worth clients of banks’ brokerage or wealth management units are an obvious object of their affection:  the portfolios they manage for these families serve as a ready-made pool of high-quality collateral that requires little due-diligence up-front, and that offers the bank complete control and the prospect of full repayment via bank-triggered liquidation should a client default on the loan.

It is not intuitive why a wealthy client would feel the urge to borrow.  Yet Wall Street’s 3 largest brokerages (BofA-Merrill, Morgan Stanley, UBS) have over $100 Billion in portfolio loans outstanding.  In total, this number might approach $250 Billion across all US banks. (source WSJ.)

Wealthy families often need to raise cash to purchase real-estate, make private investments, pay for private education, etc.  And selling down a portion of their stock-&-bond portfolio might not make sense at that particular point in time because of tax or market-timing concerns.  (To be clear, there are times when using a portfolio loan as a bridge makes a lot of sense such as when there is a mismatch between a home purchase that needs to close before another property sells.)

As is too often the case with big banks, the push to ‘distribute’ products through their Financial Advisor (FA) salesforce has turned the Securities-Based Lending program into another source of compensation for FA’s.  Below is the typical ‘pitch’ to FA’s, usually couched as a way to ‘improve’ your practice:

  • use credit lines to ‘lock-in’ the client and make it harder for them to leave;
  • avoid selling-down the portfolio off of which your fee (and commission) is calculated;
  • and finally, earn additional compensation generated by the incremental revenue tied to the loan balance.

We know the above to be true because we have had banks come in and give this same pitch directly to us!  They obviously didn’t do their homework on Single Point to know that is not the way we work.

Having come out of the big bank world I can tell you that it is absolutely true that clients with more than one product relationship tend to turnover a LOT less.  These are often the bank’s most profitable clients.  So, cross-selling has become the holy grail at every bank – whether they cater to middle-income families (like Wells Fargo)… or to the well-heeled (like JP Morgan, Goldman.)

The push by Wall Street to cross-sell credit to their Private Clients has reached a level never seen before.  No doubt that for some families these credit lines are a convenience that can help bridge them through a short-term cash squeeze. But far too often we come across families who have been using these credit lines to cover longer-term cash deficits, and while the client is ultimately responsible a ‘Financial Advisor’ who has a personal interest in promoting the use of credit is hardly worthy of the name.

I would be remiss if I didn’t say that with interest rates headed higher the logic of keeping these credit balances becomes much less compelling.  For clients coming in with credit balances we are spending time analyzing optimal pay-down plans: balancing the tax hit of raising cash at year-end versus the risk that comes from additional months of carrying stock market exposure funded with debt.

If you find yourself in a position where using a bridge loan against your portfolio might make sense we suggest you do so only after putting a detailed plan together on how you will repay the debt, and, how you will amend that plan if circumstances change.  Simply saying we’ll pay it off later is not a plan.



Additional Reading can be found below:









By | 2018-11-07T20:12:12+00:00 November 7th, 2018|Categories: Investment Planning, Lending, Single Point of View|0 Comments

About the Author:

Rene Jarquin
My path to Chief Investment Officer at Single Point most recently took me through BNY Mellon Wealth Management, where I had been since 2005. My role as Senior Portfolio Manager at BNY allowed me to work very closely with clients in constructing portfolios; while understanding their goals and always mindful of how the markets impact them both financially and behaviorally. Sitting on BNY’s Solution Strategy Committee and the Boston office’s Investment Implementation Committee has helped shape my investment decision-making. Ultimately, the desire to fully own and shape the firm's investment philosophy brought me to step into a Senior Partner role as Single Point's CIO. After receiving my bachelor’s degree at The Wharton School and my MBA from Northwestern University’s Kellogg School of Management I made a few stops prior to my 12 years at BNY. These experiences included the M&A group at GE Capital; a tech-focused merchant bank, Springwell Capital Partners; and Merrill Lynch’s Private Client Group. I have been fortunate to have the opportunity to share my expertise in giving back beyond my direct dealing with clients. Currently, I chair the investment committee for the Home for Little Wanderers. I am an active board member and former President of the Boston Chapter of the The Association of Latino Professionals for America (ALPFA). I have been a charter member of the Latino Legacy Fund of The Boston Foundation. LLF is a special interest fund targeting the Latino Community of Boston. Most recently, I have had the honor of being appointed by Governor Charlie Baker to the board of Mass Ventures, the state of Massachusetts’ venture capital arm. My wife Nancy and I, along with our two daughters, live in Wellesley, MA and enjoy relaxing on Cape Cod in the summer.

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