20 April 2018
Insurance
Securities based lending lets your assets work for you
Globally the use of securities based lending has found particular favour in the United States with the likes of Morgan Stanley and Bank of America leading the way. Both recognise that borrowing is an important component of wealth management and achieving key financial goals, so making use of securities based lending within a portfolio puts more options on the table for the client.
Traditionally assets and liabilities have kept to their own corners on a balance sheet. But now, with Securities Based Lending - or SBL - you can leverage off your assets on your terms. Rather than liquidating an investment account or shares when you need access to funds, often incurring hidden costs such as tax liabilities and a loss of future growth along the way, SBL offers a lending solution that is time sensitive, flexible, simple and effective.
What is SBL? And how does it fit into your overall wealth management plan?
Mishaal Desai, Head: Securities Based Lending at RMB Private Bank, explains that the concept involves using investments in listed shares, unit trusts and offshore shares (among others) as collateral in order to raise finance for a range of activities. "The beauty of the product lies in its simplicity," says Desai. "SBL allows clients to gain access to liquidity without having to liquidate existing investments."
This same interest is increasingly being observed among South African investors, particularly those in the high-net-worth category. In terms of RMB Private Bank's SBL offering, Desai says it has certainly been attracting attention. "Word of mouth has spread quickly across our client base, with particular interest from existing clients with security portfolios and senior executives with vesting share options," says Desai. "Together with favourable interest rates and turnaround times to implement, there are no restrictions on where the funds can be applied. So the SBL product is a powerful tool in unlocking liquidity and preserving wealth."
When to use your SBL?
Since the launch of the SBL product, clients have been eager to take up the facility to gain exposure to other business ventures, to obtain property overseas, for vehicle financing and, in increasing numbers, to pay off tertiary education fees or MBA study costs at the start of the year. According to UBS Bank in the United States, the most common uses for SBL in that market are to fund real estate purchases and business opportunities, to refinance high-interest debt, to pay tuition fees, taxes and other large yet unexpected expenses.
Desai explains that, in South Africa: "The most successful deals concluded to date have been to introduce gearing into the clients' portfolios, thereby increasing the rate of return on the investment. By making use of a geared portfolio, the client can then set stop-losses in line with his or her appetite, while enjoying the full appreciation in portfolio value. Given the performance of the markets over the years, clients have been able to generate substantial value through the gearing effect."
Desai notes that structures implemented for clients with cyclical cash flows have also been a popular use of the SBL product. "Clients in cyclical industries may have excess cash on their balance sheets for large periods of time, which is a major hindrance to investing for the long term. In these instances, the client may elect to invest cash into higher-yielding investment portfolios and make use of an SBL facility to access liquidity for the short term against their long-term investment strategy," says Desai. "In essence, SBL is able to create a solution for clients in cyclical industries or professions."
How it works
Once the investment portfolio has been accepted as collateral, the client may choose from two repayment profiles offered by the bank: an interest-only option, which involves monthly repayments on the interest portion; and an interest roll-up option, designed to work around client cash flows. The interest roll-up portion is particularly useful when providing tailor-made structuring solutions to match interest payments with a client's cash-flow constraints.
First step
While there are several applications for SBL within your investment universe, it is important to start this journey by educating yourself about the facility and working with your Private Bank Advisor to determine if SBL has a place in your portfolio. Certainly, as a holistic wealth management tool there is growing demand for the inclusion of such lending options, but taking the time to assess the appropriateness, risk and potential for you and your family is vitally important.
Traditionally assets and liabilities have kept to their own corners on a balance sheet. But now, with Securities Based Lending - or SBL - you can leverage off your assets on your terms. Rather than liquidating an investment account or shares when you need access to funds, often incurring hidden costs such as tax liabilities and a loss of future growth along the way, SBL offers a lending solution that is time sensitive, flexible, simple and effective.
Mishaal Desai, Head: Securities Based Lending at RMB Private Bank, explains that the concept involves using investments in listed shares, unit trusts and offshore shares (among others) as collateral in order to raise finance for a range of activities. "The beauty of the product lies in its simplicity," says Desai. "SBL allows clients to gain access to liquidity without having to liquidate existing investments."
This same interest is increasingly being observed among South African investors, particularly those in the high-net-worth category. In terms of RMB Private Bank's SBL offering, Desai says it has certainly been attracting attention. "Word of mouth has spread quickly across our client base, with particular interest from existing clients with security portfolios and senior executives with vesting share options," says Desai. "Together with favourable interest rates and turnaround times to implement, there are no restrictions on where the funds can be applied. So the SBL product is a powerful tool in unlocking liquidity and preserving wealth."
Since the launch of the SBL product, clients have been eager to take up the facility to gain exposure to other business ventures, to obtain property overseas, for vehicle financing and, in increasing numbers, to pay off tertiary education fees or MBA study costs at the start of the year. According to UBS Bank in the United States, the most common uses for SBL in that market are to fund real estate purchases and business opportunities, to refinance high-interest debt, to pay tuition fees, taxes and other large yet unexpected expenses.
Desai explains that, in South Africa: "The most successful deals concluded to date have been to introduce gearing into the clients' portfolios, thereby increasing the rate of return on the investment. By making use of a geared portfolio, the client can then set stop-losses in line with his or her appetite, while enjoying the full appreciation in portfolio value. Given the performance of the markets over the years, clients have been able to generate substantial value through the gearing effect."
Desai notes that structures implemented for clients with cyclical cash flows have also been a popular use of the SBL product. "Clients in cyclical industries may have excess cash on their balance sheets for large periods of time, which is a major hindrance to investing for the long term. In these instances, the client may elect to invest cash into higher-yielding investment portfolios and make use of an SBL facility to access liquidity for the short term against their long-term investment strategy," says Desai. "In essence, SBL is able to create a solution for clients in cyclical industries or professions."
Once the investment portfolio has been accepted as collateral, the client may choose from two repayment profiles offered by the bank: an interest-only option, which involves monthly repayments on the interest portion; and an interest roll-up option, designed to work around client cash flows. The interest roll-up portion is particularly useful when providing tailor-made structuring solutions to match interest payments with a client's cash-flow constraints.
While there are several applications for SBL within your investment universe, it is important to start this journey by educating yourself about the facility and working with your Private Bank Advisor to determine if SBL has a place in your portfolio. Certainly, as a holistic wealth management tool there is growing demand for the inclusion of such lending options, but taking the time to assess the appropriateness, risk and potential for you and your family is vitally important.