When you have amassed a certain level of wealth, different strategies start to make sense.
One of those strategies is to rely on loans.
But debt is supposed be bad right? Not always. 🙂
This is the key concept behind the Buy, Borrow, Die Strategy – you borrow against your appreciated assets to get access to cash. If you read the post and understand the concept, you might be wondering if you could take advantage of this.
You most certainly can.
In this post, I’ll show you how you can use the same strategy as the wealthy to get liquidity without selling appreciated assets and triggering capital gains.
Table of Contents
To recap, the basic strategy of Buy Borrow Die is that rather than selling an appreciated asset, like shares of stock, you simply take out a loan using the asset as collateral. You get cash right now, as you would in a sale, but it’s a loan so you pay interest rather than capital gains.
You could sell the appreciated asset but then you’d pay capital gains tax on the gains. Why pay a 10%-15% (long term gains rate) or more cut in taxes when there is a better option?
It’s important to note that this works especially right well now because interest rates are at historic lows.
So, how do you do this?
Check What Your Broker Offers
Some brokerages have a special type of lending program designed for this purpose – often known as portfolio loans or portfolio lines of credit. Others have no separate program and simply lump it in with the margin rules. Before you shop around, do a quick peek at what your broker offers.
If you don’t like what they have, or you’re curious what is out there, shop around because there’s quite a bit of variety.
Here are some of the more well-known and popular names and their offers:
Charles Schwab Pledged Asset Line
Charles Schwab has a specially named program called the Pledged Asset Line. It is a “flexible, non-purpose line of credit” that has you put your assets in a separate “Pledged Account” and then gives you a line of credit to access the funds in that pledged account.
There are some limitations to what you can do with the money, you cannot:
- purchase securities
- pay down margin loans
- deposit it into a brokerage account
They don’t want you to take the money and invest in in the public markets. That would make it a more traditional margin account which, I imagine, they consider riskier. Or at least in a separate risk class that requires more attention.
The most impressive part about this is that there are no fees outside of a $25 late payment fee. There is, however, a minimum initial draw of $70,000. It’s technically a portfolio line of credit but your first draw has to be over $70,000. The first slug is pretty substantial. Subsequent draws can be lower but the first one is big.
For what it’s worth, there’s little distinction between a portfolio line of credit and a portfolio loan.
As for the interest rate, Charles Schwab indexes their rates to the Secured Overnight Financing Rate (SOFR) and then adds a spread.
The rates, as of 6/19/2022, are:
|Loan Value of|
Collateral at Origination
|$100,000 – $250,000||SOFR||4.65%|
|$250,000 – $500,000||SOFR||3.40%|
|$500,000 – $1,000,000||SOFR||2.90%|
|$1,000,000 – $2,500,000||SOFR||2.40%|
|$2,500,000 and above||SOFR||1.90%|
The SOFR rate is the Secured Overnight Financing Rate, which you can see on the Federal Reserve Bank of New York website.
Wealthfront Portfolio Line of Credit
Wealthfront offers a similar product – a Portfolio Line of Credit. If you have just $25,000 in assets (vs. Schwab’s higher $100,000 requirement), you can access this product and borrow against up to 30% of your portfolio.
The Wealthfront Portfolio Line of Credit is a margin lending product so you can take the money and do whatever you want with it. There are no restrictions as is the case of Charles Schwab’s Pledged Asset Line. You can’t deposit it back into the account associated with the Portfolio Line of Credit but you can deposit it with another one.
Wealthfront’s rates are set by the Effective federal funds rate (EFFR) plus a spread, which are, as of 6/19/2022:
|Greater of the aggregate net deposits|
and market values of your taxable
|Annual Interest Rate|
Rounded Down to the Nearest
0.05% in Your Favor
|$25,000 – $499,999||Effective federal funds rate +3.60%|
|$500,000 – $999,999||Effective federal funds rate +2.85%|
|$1,000,000 +||Effective federal funds rate +2.35%|
Not all banks that offer a Portfolio Line of Credit will allow you to purchase stocks. For example, PNC Bank offers a Portfolio Line of Credit but you are not allowed to purchase investment securities or repay margin debt. So even if they share the same name, you have to check the terms carefully.
Ally Invest Margin Account
Ally Invest, which is the broker I use, doesn’t have a special name or account type – they call it a Margin Account like most other brokers. You have to apply for a margin account but when you are approved, you can borrow against it and transfer the funds out for use elsewhere. You can even request a check.
Just as a frame of reference, Ally Invest offers a Margin Account with the following interest rates (as of 3/2/2023):
|Margin Balance||Interest Rate|
|Up to $9,999||12.25%|
|$10,000 – $24,999||12.25%|
|$25,000 – $49,999||12.00%|
|$50,000 – $99,999||11.25%|
|$100,000 – $249,999||10.00%|
|$250,000 – $499,999||9.00%|
|$500,000 – $999,999||8.50%|
|$1,000,000 or more||7.75%|
Private Investment Advisors
There are private investment advisors who offer margin accounts with varying terms and conditions. Wealthfront allows you to borrow against 30% of the assets, a private investment advisor may allow you to borrow far more (I’ve seen percentages as high as 85%). Some may allow you to put up different assets beyond just stocks, like stock options (call and put options).
More importantly, they may offer more competitive interest rates because they shop around for different custodians. (but check the other fees!)
I’ve seen some firms offer rates below those you see above though I don’t know if they make it up the difference in other fees or requiring you to use some of their other services (which come at a cost).
Yes, This is Just a Margin Account
If it sounds like the Wealthfront Portfolio Line of Credit is like a margin account, you are right. Many brokerages take this route to offer this type of product.
With Charles Schwab, it’s a little different because they’ve created a less risky version by restricting how you use the money. Since you cannot use it to buy more stock, they’ve reduced the risk a bit. You can still invest it in other assets, like a house or starting a business, but you can’t put it back into the market. It feels like a small distinction to be honest since your collateral is still volatile.
You could make the argument that you are purchasing a less volatile asset with the funds? But if you’re spending it on a vacation, that has a value of $0. You can’t get more volatile than that! 🙂
Consider Home Equity Loans
The Buy Borrow Die Strategy can start with any asset, preferably an appreciated one. If it hasn’t appreciated, you could just sell it, pay no capital gains taxes, and get your cash.
That appreciated asset can be anything and for many Americans, that asset is their home.
If a portfolio loan or line of credit seems a bit much for you, consider it’s close cousin – the home equity loan or line of credit. Same idea except home values are certainly less volatile (and the prices are not published every second) and so you have less risk involved.
The rates on those financial instruments tend to be lower as well. In the end, cash is cash and it doesn’t matter if it comes from the equity in your home or the equity in your stock portfolio.
What To Watch Out For
There’s a lot to watch for and this is not meant to be an exhaustive list. I’ve never used a margin account (and never intend to for the purposes of trading) so this are my initial thoughts based on what I’d be considering if I went this route.
First, since you are getting a loan and it is being secured by underlying assets, you can have situations where the broker takes action without having to check with you first. This happens when the underlying assets fall in value.
For example, if the value of the assets go down considerably, the broker may sell them to meet margin requirements. If you read Wealthfront’s Margin Handbook, you’ll see this section on what Wealthfront is permitted to do with respect to your account (this is essentially the same text for all margin accounts and not unique to Wealthfront):
- You can lose more funds than you deposit in the margin account. A decline in the value of securities in your margin account may require you to provide us with additional funds to avoid the forced sale of those securities or other securities or assets in your account(s).
- We can force the sale of securities or other assets in your account(s). If the equity in your margin account falls below the maintenance margin requirements, or our higher “house” requirements, we can sell the securities or other assets in any of your account(s) held with us to cover the margin deficiency. You also will be responsible for any shortfall in the account after such a sale.
- We can sell your securities or other assets without contacting you. Some investors mistakenly believe that a firm must contact them for a margin call to be valid, and that the firm cannot liquidate securities or other assets in their margin accounts to meet the call unless the firm has contacted them first. This is not the case. While we will attempt to notify you of margin calls, we are not required to do so. However, even if we have contacted you and provided a specific date by which you can meet a margin call, we can still take necessary steps to protect our financial interests, including immediately selling the securities without notice to you.
- You are not entitled to choose which securities or other assets in your account(s) are liquidated or sold to meet a margin call. Because the securities are collateral for the margin loan, we have the right to decide which security to sell in order to protect our interests.
- We can increase our “house” maintenance margin requirements at any time and are not required to provide you advance written notice. These changes in firm policy often take effect immediately and may result in the issuance of a maintenance margin call. Your failure to satisfy the call may cause us to liquidate or sell securities in your account(s).
- You are not entitled to an extension of time on a margin call. While an extension of time to meet margin requirements may be available to you under certain conditions, a customer does not have a right to the extension.
These are all well understood if you use a margin account. You may realize it if you think this is something different or radically new. If you borrow against something and the value of that something goes down, the lender has to take action to protect themselves.
There are some other wrinkles too. For example, you can’t use assets in a retirement account.
In the case of Wealthfront, and several others, all deposits into the investment account associated with the Portfolio Line of Credit will be applied to the outstanding balance (the loan) first. So you’ll want to make deposits into another account, unless your purpose was to pay down the loan.
This also means that if any holdings pay out dividends, they are treated as payments for the loan. Minor details but that may be significant if you rely on those dividend stocks for income too.
If you are shopping around, it benefits you to do your homework because rates will vary. Just in the examples above, we saw that Charles Schwab’s rates are pegged to SOFR while Wealthfront’s are pegged to EFFR. SOFR is not the same as EFFR. If you’re curious about the difference between the two, this post has a great explanation. They’re close but there are some slight differences and you should understand them.
Generally speaking, I’d expect someone who goes this route is going to be financially savvy and these “things to look for” tend to be near the margins. You pay a little extra here or there and it’s not going to significantly impact your financial situation. That being said, do your homework because there is quite some variety out there.