berkshire101 Posted April 3, 2015 Share Posted April 3, 2015 I'm not sure if the subject title is the correct term to use. Hopefully someone can shed some light on the matter. At my weekly toastmasters meeting, the speaker (who is a financial advisor with Merrill Lynch) gave a presentation about his job. He spoke about a product that his firm offers that not a lot of people have heard of. Basically, if you have investments (such as stocks) worth say $500k, you can take a loan against it to buy say a house, car, vacation, start a business, etc. It's equivalent to getting a mortgage and you make monthly payments. He said this way, you don't have to sell your investments. Rather, you can let it grow and use your earned income to pay the loan. You get to determine the duration of the loan. Some people get a 20-year loan to buy a house. And the interest rate is tied to Libor. It seems like you're getting a mortgage to buy whatever you want with. Also, the loan isn't reported to the credit bureaus so it won't show up on your credit history. You can go to a bank and still get a traditional loan. Has anyone heard of such a product? I'm not sure what the correct term is. It would be cool if you could get a 30-year fixed mortgage at today's interest to buy stocks. I asked for his business card so I'll probably give him a call soon. Link to comment Share on other sites More sharing options...
thepupil Posted April 3, 2015 Share Posted April 3, 2015 What are the differences between this and a margin loan? Link to comment Share on other sites More sharing options...
berkshire101 Posted April 3, 2015 Author Share Posted April 3, 2015 What are the differences between this and a margin loan? Well... a margin loan is callable. So if your investments decline significantly and you can't meet the margin call then you'll be force to sell your securities. This loan is too. But there's a duration on when it's callable. So it's more predictable, and the interest rate is tied to Libor. I think my brokerage is asking like 8-10% interest on a margin account. I'm not expert on this. That's what I got from the short 10 minute speech. Link to comment Share on other sites More sharing options...
jawn619 Posted April 3, 2015 Share Posted April 3, 2015 What are the differences between this and a margin loan? Well... a margin loan is callable. So if your investments decline significantly and you can't meet the margin call then you'll be force to sell your securities. This loan is too. But there's a duration on when it's callable. So it's more predictable, and the interest rate is tied to Libor. I think my brokerage is asking like 8-10% interest on a margin account. I'm not expert on this. That's what I got from the short 10 minute speech. This is very interesting. Please let me know what you find out. Link to comment Share on other sites More sharing options...
JBird Posted April 3, 2015 Share Posted April 3, 2015 http://www.schwab.com/public/schwab/banking_lending/pledged_asset_line On the left side of the page there's an FAQ Link to comment Share on other sites More sharing options...
Guest Schwab711 Posted April 3, 2015 Share Posted April 3, 2015 I've done this with M&T and I'm a huge fan of this financing. Cheapest financing available and the non-callable term features are essential for me to take on leverage. For those interested, behind the scenes is generally a Repo transaction with the bank so they earn fees + interest. Link to comment Share on other sites More sharing options...
berkshire101 Posted April 3, 2015 Author Share Posted April 3, 2015 I've done this with M&T and I'm a huge fan of this financing. Cheapest financing available and the non-callable term features are essential for me to take on leverage. For those interested, behind the scenes is generally a Repo transaction with the bank so they earn fees + interest. Did you use this to add leverage to your investment portfolio? I don't keep a huge cash balance in my portfolio. So if there is a significant decline, having this financing available would be a great source! Link to comment Share on other sites More sharing options...
berkshire101 Posted April 3, 2015 Author Share Posted April 3, 2015 http://www.schwab.com/public/schwab/banking_lending/pledged_asset_line On the left side of the page there's an FAQ I read the FAQs and it says the proceeds may not be used to purchase securities or to pay down margin lines, and may not be deposited into Schwab brokerage accounts. >:( :( Link to comment Share on other sites More sharing options...
jawn619 Posted April 3, 2015 Share Posted April 3, 2015 http://www.schwab.com/public/schwab/banking_lending/pledged_asset_line On the left side of the page there's an FAQ I read the FAQs and it says the proceeds may not be used to purchase securities or to pay down margin lines, and may not be deposited into Schwab brokerage accounts. >:( :( start a different brokerage account? LOL Link to comment Share on other sites More sharing options...
constructive Posted April 3, 2015 Share Posted April 3, 2015 What are the differences between this and a margin loan? Well... a margin loan is callable. So if your investments decline significantly and you can't meet the margin call then you'll be force to sell your securities. This loan is too. But there's a duration on when it's callable. So it's more predictable, and the interest rate is tied to Libor. I think my brokerage is asking like 8-10% interest on a margin account. I'm not expert on this. That's what I got from the short 10 minute speech. I wouldn't compare it to the margin rate at a typical retail broker. Using margin at any retail brokerage except for Interactive Brokers is clearly a terrible idea. For low balances, IB margin is about 1.62% while Schwab PAL is about 3.67% (varying based on the benchmark and the amount). Margin is cheaper because they have easier access to your collateral to protect the value of their loan. Link to comment Share on other sites More sharing options...
thepupil Posted April 3, 2015 Share Posted April 3, 2015 Can you all provide a little more detail on how you are able to avoid the possibility of a margin call with this? Maybe those who've used it (Schwab) can provide a little more detail on the collateral requirements (ie what % of NAV was borrowed, what restrictions in terms of concentration were put on account, etc. etc.) I don't understand why banks would take the risks of lending serious $ without being able to liquidate your portfolio if it fell in value. It just sounds too good to be true to be able to borrow against securities, but not have to worry about them going down in value. Sorry if I'm missing something obvious here. Link to comment Share on other sites More sharing options...
berkshire101 Posted April 3, 2015 Author Share Posted April 3, 2015 So quick update. I talked to my financial advisor friend. The product is called a loan management account. I scheduled a meeting for next week to discuss the matter more indepth. Basically, the advantage of getting a 30-year mortgage is that even though your house may significantly decline in value, if you can still make the payments then you're not force to sell the house. So if I could get financing on those terms for investments then it would be ideal. With a typical margin account, most sell securities to pay back the margin. Since I have a taxable account and don't want to take a tax gain hit, making monthly payments to pay off the loan would solve that problem. I think. Link to comment Share on other sites More sharing options...
berkshire101 Posted April 3, 2015 Author Share Posted April 3, 2015 FYI, Here are two brochures from Merrill Lynch that I stumbled upon: https://mlaem.fs.ml.com/content/dam/ML/solutions/pdf/303601PM%20LMA%20Fact%20Sheet%20with%20rates.pdf https://www.ml.com/publish/content/application/pdf/GWMOL/MLWM_RO-Personal-Financing-Capabilities.pdf Link to comment Share on other sites More sharing options...
fareastwarriors Posted April 3, 2015 Share Posted April 3, 2015 So quick update. I talked to my financial advisor friend. The product is called a loan management account. I scheduled a meeting for next week to discuss the matter more indepth. Basically, the advantage of getting a 30-year mortgage is that even though your house may significantly decline in value, if you can still make the payments then you're not force to sell the house. So if I could get financing on those terms for investments then it would be ideal. With a typical margin account, most sell securities to pay back the margin. Since I have a taxable account and don't want to take a tax gain hit, making monthly payments to pay off the loan would solve that problem. I think. It sounds really interesting. let us know how it goes. Link to comment Share on other sites More sharing options...
Range Posted April 3, 2015 Share Posted April 3, 2015 FYI, Here are two brochures from Merrill Lynch that I stumbled upon: https://mlaem.fs.ml.com/content/dam/ML/solutions/pdf/303601PM%20LMA%20Fact%20Sheet%20with%20rates.pdf https://www.ml.com/publish/content/application/pdf/GWMOL/MLWM_RO-Personal-Financing-Capabilities.pdf It says right in the first link that they can liquidate the positions for you and you have no control over what they sell. You are also required to post more collateral if the value of the assets go down in value Read the section titled "Understanding risks associated with your LMA account" Link to comment Share on other sites More sharing options...
berkshire101 Posted April 3, 2015 Author Share Posted April 3, 2015 FYI, Here are two brochures from Merrill Lynch that I stumbled upon: https://mlaem.fs.ml.com/content/dam/ML/solutions/pdf/303601PM%20LMA%20Fact%20Sheet%20with%20rates.pdf https://www.ml.com/publish/content/application/pdf/GWMOL/MLWM_RO-Personal-Financing-Capabilities.pdf It says right in the first link that they can liquidate the positions for you and you have no control over what they sell. You are also required to post more collateral if the value of the assets go down in value Read the section titled "Understanding risks associated with your LMA account" Yes, I saw that. A mortgage is callable too if the lender deems that you are no longer qualify to meet the required obligations. It's a safety measure the lender usually states upfront. That's something I'll clarify at the meeting. I don't plan to leverage 100% of my portfolio. At most, it's 25%. So my portfolio has to drop 75% before I'll start to have a margin call. I'm more interested in having the ability to define the loan duration and the fixed-rate option for the monthly payments. Hopefully it's not too good to be true. Link to comment Share on other sites More sharing options...
IntrinsicEdge Posted April 3, 2015 Share Posted April 3, 2015 As only Josh Brown (reformed broker) can tell it, below is a link to his article on securities-based lending in Fortune from Dec 2014 http://fortune.com/2014/12/10/securities-based-lending-banks/ Link to comment Share on other sites More sharing options...
Cageyone Posted April 4, 2015 Share Posted April 4, 2015 Are Canadian brokers into this "game"? I'm considering a new car purchase and rather than selling securities in a taxable account I'm considering a Scotiabank car loan at 3.99 percent. So are there Canadian brokers offering a significantly lower rate on securities backed loans? Link to comment Share on other sites More sharing options...
fareastwarriors Posted April 4, 2015 Share Posted April 4, 2015 As only Josh Brown (reformed broker) can tell it, below is a link to his article on securities-based lending in Fortune from Dec 2014 http://fortune.com/2014/12/10/securities-based-lending-banks/ Still sounds a good product if used wisely. that's the key always though, wisely... Link to comment Share on other sites More sharing options...
Tim Eriksen Posted April 4, 2015 Share Posted April 4, 2015 FYI, Here are two brochures from Merrill Lynch that I stumbled upon: https://mlaem.fs.ml.com/content/dam/ML/solutions/pdf/303601PM%20LMA%20Fact%20Sheet%20with%20rates.pdf https://www.ml.com/publish/content/application/pdf/GWMOL/MLWM_RO-Personal-Financing-Capabilities.pdf It says right in the first link that they can liquidate the positions for you and you have no control over what they sell. You are also required to post more collateral if the value of the assets go down in value Read the section titled "Understanding risks associated with your LMA account" Yes, I saw that. A mortgage is callable too if the lender deems that you are no longer qualify to meet the required obligations. It's a safety measure the lender usually states upfront. That's something I'll clarify at the meeting. I don't plan to leverage 100% of my portfolio. At most, it's 25%. So my portfolio has to drop 75% before I'll start to have a margin call. I'm more interested in having the ability to define the loan duration and the fixed-rate option for the monthly payments. Hopefully it's not too good to be true. Most mortgages are not callable. Seconds (HELOCs) often are. Link to comment Share on other sites More sharing options...
Jurgis Posted April 4, 2015 Share Posted April 4, 2015 Isn't this like a loan against your 401(k) just for regular account? Link to comment Share on other sites More sharing options...
DavidVY Posted April 22, 2015 Share Posted April 22, 2015 One of the homies @ the cigar bar, said his brokerage account will have a 2.5% fixed rate pledge loan against his brokerage assets. He's going to use it buy shares in private businesses yielding 10-11%, paying dividends of 5-6%. Its just another financial engineering (arbitrage spread) game. Link to comment Share on other sites More sharing options...
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