The Financial Industry Regulatory Authority (FINRA) and the U.S. Securities and Exchange Commission (SEC) on Monday issued a joint investor alert warning investors about some of the pitfalls of using securities-backed lines of credit (SBLOCs).
Some securities firms market SBLOCs as part of a retirement income strategy to fund short-term expenses, the joint alert notes. These loans are often marketed as an easy way for investors to obtain cash by borrowing against their portfolio, without having to liquidate their securities.
However, these arrangements carry risks, the joint alert cautions, including potential tax consequences, and the possibility that long-term investment plans could be undone if the value of the portfolio declines and investors are forced to sell.
The joint alert explains how SBLOCs work, and it provides investors with 10 questions they can ask to help ensure they understand the potential risks and benefits of these products. The joint alert explains that these products can allow investors to avoid capital gains taxes because they don’t have to liquidate their securities, and they allow investors to continue accruing dividends, interest and market gains.
The joint alert encourages investors to: ask questions about certain features of these products, such as how brokers are compensated; ensure that they know who the lender is; and understand how things, such as interest rates and asset mix, may matter in these sorts of arrangements.
“We want to provide investors with the basics of SBLOCs, how they are marketed and the benefits and risks you should consider before posting your investment portfolio as collateral,” says Gerri Walsh, senior vice president for investor education at FINRA.
“SBLOCs might seem like an attractive way to access extra capital when markets are producing positive returns, but market volatility can magnify your potential losses, placing your financial future at risk,” she adds.