Leveraging Investment Value through a Pledged Asset Line

Peter A. ScilovatiJune 10, 2016

couple Financial Planning

Clients often ask us about investing in a second home, renovating an existing property, expanding their business, paying expenses such as taxes or tuition, or helping a loved one with a financial need. For example, a client recently called with the desire to help their child with the down payment on a first home. To raise the money, clients often must liquidate a portion of their securities portfolio, potentially incurring adverse tax consequences and disrupting their long term portfolio strategy. Clients may be reluctant to dip into their investment portfolio to fund these aspirations as their life-time goals may be compromised.

Our response to the client: Have you considered tapping the value of your investment account for borrowing? Securities-based borrowing gives you access to money based on the value of your non-retirement investment portfolio. Charles Schwab, our custodian for client assets, has helped our clients with an innovative strategy called the Pledged Asset Line. Schwab Bank’s Pledged Asset Line (PAL) is a flexible borrowing solution that can help clients leverage the value of their investments through a revolving line of credit. This type of borrowing may be easier to obtain and more cost-effective than other alternatives.

Here are some facts:

  • A Pledged Asset Line is a non-purpose revolving line of credit from Schwab Bank secured by eligible assets held in a separate Pledged Asset Account (PAASB) maintained at Charles Schwab & Co., Inc. (Schwab).
  • A PAASB is a Schwab brokerage account that holds non – retirement assets pledged as collateral for the Pledged Asset Line. Because the PAASB holds collateral for the Pledged Asset Line, it is treated as a cash or non-margin account. The following limitations have been established on the PAASB:
    • No margin capability
    • No option trading
    • No payment available features on the PAASB, including check writing, debit card, or bill pay privileges
    • No withdrawals without the consent of Schwab Bank
  • Clients may be able to borrow up to 70% of the value of their eligible assets pledged as collateral.
  • Up to 75% of a client’s total liquid non-retirement assets may be pledged.
  • Individuals, joint borrowers, and revocable living trusts with identical trustee, trustor, and beneficiary are all eligible.
  • Rates are based on the market-driven one-month LIBOR (London interbank offered rate) plus an interest rate spread. The interest rate spread is determined based on the maximum Pledged Asset Line amount.
  • There is no fee to establish or maintain the Pledged Asset Account; however, standard trading commissions will apply to all trading in the Pledged Asset Account.
  • Line of credit amounts typically range from $100,000 to $20,000,000 and above.
  • For loans with pledged assets already held at Schwab, processing time is approximately 7–10 business days once a completed application with the required documentation is received.
  • Clients may choose to make monthly payments, or to simply capitalize interest on their Pledged Asset Line if there is sufficient availability (not to exceed line amount). Clients may also pay back any or all of the line at any time, with no prepayment penalties.

What are the Risks:

Before you decide to apply for a Pledged Asset Line, make sure you understand the following risks, which are detailed further in the Pledged Asset Line application:

  • You can lose more assets than you are required to deposit in your collateral account. A decline in the value of the securities in your collateral account may result in a reduction in your Pledged Asset Line, a demand that you deposit additional funds or securities into your collateral account (such demand is a collateral maintenance call), or the forced sale of securities in your collateral account. The Pledged Asset Line is a full recourse obligation, and you will still be responsible for satisfying any obligation that remains outstanding after such sale.
  • The lender can force the sale of securities in your collateral account to satisfy your Pledged Asset Line obligations.
  • Your collateral account also secures any obligations owed to Schwab.
  • You are not entitled to choose which securities in your account are liquidated or sold if you fail to meet a collateral maintenance call.
  • You are not entitled to an extension of time to meet a collateral maintenance call.
  • You may incur adverse tax consequences if your securities are sold, in connection with your pledge of securities as loan collateral.

In our view, providing clients with the ability to stay fully invested while meeting a short term expense is an invaluable tool. We are happy to help you explore the options available through Schwab Bank’s Pledged Asset Line (PAL). Please contact our office if you would like to discuss further (610-651-2777).

Source: Charles Schwab Bank