Securities-backed lines of credit (SBLOC) are loans that are marketed to investors as an easy way to access cash by borrowing against the assets in their investment portfolios. They are widely pitched by financial advisors and used as a source of revenue for firms in times of solid market returns.
Brokers who recommend SBLOC to their customers often earn additional compensation or a portion of the fees generated from the SBLOC. And, the financial advisor benefits because the client does not have to liquidate assets to pay for things with cash, which would diminish the assets held in the account and the potential fees and commissions that could be earned by the broker in the future.
SBLOC carry enormous risks. As we end the longest bull market in history, sharp declines in virtually all asset classes have caused a wave of margin and maintenance calls. As the value of pledged collateral decreases, investors are expected to come up with the money or their investment positions may be liquidated.
For most investors, coming up with the money to quickly pay off a SBLOC is not an easy task. The typical investor using a SBLOC has spent the money on something that is not easy to sell or cannot be returned, like a house or college tuition payments. In that case, the investor may suffer substantially losses as a result of forced liquidation of the underlying collateral – their investment portfolio. Forced liquidations could also result in substantial tax liability that the investors had not prepared for.
If your financial advisor recommended using your investment portfolio as collateral to a loan and you lost money as a result, the attorneys at Meyer Wilson are interested in speaking with you. Our investment fraud lawyers are nationally recognized for representing investors across the country in securities arbitration and litigation to recover losses caused by the misconduct of brokerage firms and financial advisors. Contact us today for a free consultation.