Strategic Liquidity: Understanding Securities-Based Lines of Credit

When liquidity needs arise—whether for real estate acquisitions, tax payments, or unexpected opportunities—high-net-worth investors often face a common dilemma: How do you access capital without disrupting a thoughtfully constructed long-term investment strategy?

Liquidating equities or fixed-income assets to meet short-term capital demands can trigger unwanted consequences: incurring taxable capital gains, altering strategic asset allocations, or exiting quality positions at inopportune market times.

For high- and ultra-high-net-worth families, a securities-based line of credit, such as Schwab’s Pledge Asset Line ® (PAL), offers a non-purpose borrowing option that can provide liquidity while the pledged portfolio remains invested.¹

What Is a Pledged Asset Line?

A PAL is an uncommitted, revolving line of credit secured by eligible securities held within your non-retirement brokerage account.

Unlike a traditional mortgage or personal loan, a PAL uses your existing portfolio as collateral.

Key Features & Considerations:

1. Portfolio Continuity: Because your pledged investments generally remain in your account, they can stay invested in accordance with your broader wealth plan, can continue to earn interest and dividends and to rise or fall in value.
2. Tax Deferral: Borrowing is generally not a taxable event, so drawing on a line instead of selling can defer the realization of capital gains. Gains are deferred, not eliminated. If pledged securities are later sold, including by the lender to satisfy a demand, gains may be realized at an unfavorable time. Whether interest is deductible depends upon your particular circumstances.
3. Variable, Benchmark-Based Rates: Rates are variable and equal a benchmark rate (for Schwab, SOFR) plus a spread set by the lender. Because the loan is secured, rates are often lower than those on unsecured personal loans, but there is no cap on how high the rate can rise, and the lender may replace the benchmark and change the spread.

Practical Use Cases for High-Net-Worth Investors

Pledged Asset Lines are non-purpose loans, meaning proceeds cannot be used to purchase or carry securities or to repay any margin loan, and cannot be deposited into any brokerage account. Within those limits, and subject to the lender’s terms, a PAL can be used for needs such as:

• Real Estate Financing: Make all-cash offers on primary, or vacation properties, or bridge financing gaps while awaiting primary mortgage funding. Because the line is payable on demand, it is not a substitute for long-term financing.
• Tax Payments: Cover quarterly estimated or annual tax obligations without liquidating income-generating investments.
• Major Life Expenditures: Address major personal expenses or estate planning strategies.

Navigating the Risks: Important Considerations

 Borrowing against a portfolio introduces material risks, including:

• Demand and Termination Risk:The line is payable on demand. The lender may require repayment of all or part of the balance at any time, for any reason or no reason, even if you are current and not in default. It may also decline new loan requests or terminate the line at any time. You should be prepared to repay the full balance on short notice.
• Market & Collateral Risk: The borrowing power of your line depends on the market value of pledged securities and on the loan value the lender assigns to them, which the lender may change at any time without prior notice. A market decline or change in the lender’s collateral criteria may trigger a maintenance call requiring you to deposit additional assets or pay down a portion of the loan. Adding collateral does not prevent the lender from demanding full repayment.
• Variable Rate Exposure: Pledged lines typically feature variable interest rates. Fluctuations in benchmark interest rates can impact monthly borrowing costs over time. There is no cap on the rate, and the lender may replace the benchmark index and change the spread.
• Forced Sale Risk: If a maintenance call is not met, or after the lender demands repayment, the lender may sell any or all pledged assets without prior notice to you and may choose which assets to sell, potentially realizing capital gains at an unfavorable time and incurring transaction costs.
• Negative Amortization: Unpaid finance charges are added to principal, creating negative amortization on the loan, so interest accrues on unpaid interest, and the balance can grow even if you borrow nothing more. The lender may also charge a late fee on overdue payments.
• Unilateral Changes: The lender may change the terms of the line at any time, as the agreement permits, including the benchmark index, the spread, and the collateral it accepts.

Strategic Guidance with Aviance Capital Partners

At Aviance Capital Partners, we view lending solutions not in isolation, but as an integral part of your overarching asset allocation and liability management strategy.

As an independent registered investment advisor, we use Charles Schwab & Co. Inc. as a custodian for client accounts. Securities-based lines of credit are offered by a separate Schwab entity, Charles Schwab Bank, SSB. We can help you evaluate whether a line fits your balance sheet, assist with the application, and monitor the line alongside your portfolio. The lender alone sets the terms of any line, including approval, rate, and collateral requirements.  We consider borrowing in light of your risk tolerance, cash flow needs, and long-term goals.

Because our advisory fee is based on the assets we manage, we have an incentive to recommend borrowing against your portfolio rather than selling assets. Our Form ADV Part 2A describes this and other conflicts of interest.

Interested in exploring whether a securities-backed lending facility can fit into your broader wealth plan? Reach out to your Aviance portfolio manager or wealth advisor today for a personalized analysis.

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Important Disclosures

This post is for educational and informational purposes only and does not constitute an offer to lend, a solicitation, or financial, legal, or tax advice. Aviance Capital Partners, LLC ("Aviance") is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. Pledged Asset Lines (PAL) and securities-backed lending products are offered and extended directly by third-party financial institutions, including Charles Schwab Bank, SSB, an affiliate of Charles Schwab & Co., Inc. Products are subject to credit approval, collateral evaluation, and lender terms and conditions. Aviance is not a bank or lender and does not originate or approve credit products. Pledged Asset Line® is a registered trademark of The Charles Schwab Corporation or its affiliates. Borrowing against securities involves risk, including the risk of market decline, interest rate fluctuations, the lender’s demand for repayment at any time, and forced liquidation of securities. Investors should consult with their legal, and tax advisors prior to entering into any leverage or credit agreement.