Pledged Asset Lines: A Guide for High Net Worth Individuals

If you are a high net worth individual (HNWI) with a substantial investment portfolio, you may be looking for ways to leverage your assets to access funds without liquidating them. One option that may suit your needs is a pledged asset line (PAL), which is a type of securities-based line of credit that allows you to borrow against the value of your investments. In this post, we will explain what a PAL is, how it works, what are its benefits and risks, how it compares to other lending options, and how you can manage it effectively with Kubera, a comprehensive net worth tracker.

Overview of Pledged Asset Lines

A PAL is a line of credit that is secured by the value of your investment portfolio. You can use your assets, such as stocks, bonds, mutual funds, or ETFs, to secure a loan from a lender, such as a bank or a broker-dealer. The lender will transfer your assets to a pledged account, where they will remain as collateral for the loan. You can then access the funds as needed, up to the limit of your PAL.

A PAL is different from a margin loan, which is another way of borrowing against your investments. A margin loan is a loan from your brokerage account that uses your securities as collateral. However, a margin loan has different interest rates, borrowing limits, and risks than a PAL. We will discuss these differences in more detail later in this post.

To qualify for a PAL, you need to have at least $100,000 in investable assets and a taxable investment account. A PAL is not available for retirement accounts or business accounts. A PAL is also not intended for purchasing securities or paying off margin loans. It is meant for non-purpose borrowing, which means you can use it for any personal or business expense that is not related to securities trading.

A PAL can be a useful tool for HNWIs who want to access funds without selling their assets or incurring capital gains taxes. It can also provide flexibility in repayment terms and higher potential loan value than other lending options. However, a PAL also comes with certain risks and challenges that need to be carefully considered before applying for one.

Functioning of Pledged Asset Lines

A PAL is a line of credit that is provided by a lender based on the market value of the securities that you place in a pledged account. The lender will determine the loan value of your collateral based on factors such as the type, quality, and diversification of your assets. The loan value may range from 50% to 95% of the market value of your securities, depending on the lender’s policies and market conditions.

The loan amount that you can access through a PAL begins at $100,000 with a required initial minimum advance of $70,000. You can borrow up to $20 million in investments held in a pledged account, depending on the lender and your eligibility. You can use diverse assets such as mutual funds, pledged securities, and investment accounts for a PAL.

A PAL has a variable interest rate that is based on the loan value of your collateral at origination. The interest rate is calculated as the sum of SOFR (Secured Overnight Financing Rate) plus the applicable interest rate spread. SOFR is an alternative benchmark rate to LIBOR (London Interbank Offered Rate), which is being phased out by 2023. LIBOR is another short-term interest rate that influences the cost of borrowing money in financial markets.

The interest rate on your PAL may change over time due to fluctuations in SOFR or changes in the loan value of your collateral. The interest rate may also vary depending on the size and diversification of your portfolio and the amount and duration of your borrowing.

A PAL provides liquidity to borrowers by allowing them to access additional funds without selling their assets. A PAL is a revolving line of credit, which means you can draw funds as needed and repay them at any time. There is no set term for the line of credit, so you can use it as long as you meet the lender’s requirements and maintain sufficient collateral.

You can choose how much you want to pay each month on your PAL balance, as long as you meet the minimum payment requirement set by the lender. The minimum payment may be based on factors such as the interest rate, the outstanding balance, and the loan value ratio. You can also pay more than the minimum amount or pay off the entire balance at any time without any prepayment penalties.

Examples of Pledged Asset Line Providers

One example of a PAL provider is Charles Schwab Bank, which offers an uncommitted revolving non-purpose securities-based line of credit through its Schwab Bank Pledged Asset Line® program. This program allows current Schwab customers to take advantage of their investments without selling them.

Schwab Bank Pledged Asset Line® is a flexible and convenient way to access funds for personal or business needs. You can use it for purposes such as home improvement, education, travel, or business expansion. You can also use it to diversify your credit portfolio and complement your existing lending options.

Schwab Bank Pledged Asset Line® has competitive interest rates that are based on the loan value of your collateral at origination. The interest rate is calculated as the sum of SOFR plus the applicable interest rate spread. The interest rate may change over time due to changes in SOFR or the loan value of your collateral.

Schwab Bank Pledged Asset Line® has a minimum loan amount of $100,000 and a maximum loan amount of $20 million, depending on your eligibility and the value of your pledged assets. You can use a variety of assets to secure your PAL, such as stocks, bonds, mutual funds, or ETFs. However, you cannot use retirement accounts or business accounts as collateral.

Schwab Bank Pledged Asset Line® has a flexible repayment structure that allows you to choose how much you want to pay each month, as long as you meet the minimum payment requirement. The minimum payment is based on the interest rate, the outstanding balance, and the loan value ratio. You can also pay more than the minimum amount or pay off the entire balance at any time without any prepayment penalties.

Schwab Bank Pledged Asset Line® is due and payable upon demand by Schwab Bank, which means the bank can ask you to repay the outstanding loan balance at any time. You also need to maintain sufficient collateral in your pledged account to avoid a maintenance call from Schwab Bank. A maintenance call is a request from the bank to deposit additional funds or eligible assets if the value of your pledged securities decreases below a certain level. If you fail to meet the maintenance call, Schwab Bank may liquidate some or all of your pledged assets to cover the loan balance.

Five Benefits of a Pledged Asset Line

A PAL can offer several benefits to HNWIs who want to access funds without selling their assets or incurring capital gains taxes. Some of these benefits are:

Avoiding Liquidation of Assets: A PAL allows you to preserve your investment portfolio while accessing funds for personal or business needs. You do not need to sell your assets, which may prevent potential capital gains taxes and preserve your long-term investment strategy.
Flexible Repayment Options: A PAL has a flexible repayment schedule that allows you to adapt your monthly payments according to your cash flow needs. You can pay more than the minimum amount or pay off the entire balance at any time without any prepayment penalties. There is no set term for the line of credit, so you can use it as long as you meet the lender’s requirements and maintain sufficient collateral.
Higher Potential Loan Value: A PAL can provide access to larger loan amounts than other lending options, depending on the value of your investments. You can borrow up to $20 million in investments held in a pledged account, depending on the lender and your eligibility.
Tax Benefits: A PAL can help you avoid selling investments and incurring capital gains taxes, which may reduce your tax liability and increase your net worth. However, you should consult a tax advisor to fully understand the tax consequences of using a PAL.
Diversification in Credit Portfolio: A PAL can complement your existing lending options, such as credit cards or home equity lines of credit (HELOCs), and increase your financial flexibility. You can use a PAL for different purposes than other loans and diversify your sources of credit.

Five Risks Associated with Pledged Asset Lines

A PAL also comes with certain risks and challenges that need to be carefully considered before applying for one. Some of these risks are:

Market Volatility Impact: A PAL is subject to fluctuations in the market value of the securities that you place in a pledged account. If the value of your securities decreases due to market volatility, the loan value of your collateral may also decrease, which may affect your borrowing power and interest rate.
Maintenance Call from Broker-dealer: A PAL requires you to maintain sufficient collateral in your pledged account to avoid a maintenance call from the lender. A maintenance call is a request from the lender to deposit additional funds or eligible assets if the value of your pledged securities decreases below a certain level. If you fail to meet the maintenance call, the lender may liquidate some or all of your pledged assets to cover the loan balance.
Interest Rate Fluctuations: A PAL has a variable interest rate that is based on SOFR plus the applicable interest rate spread. The interest rate may change over time due to changes in SOFR or the loan value of your collateral. Changes in short-term interest rates, such as LIBOR, could also affect the interest rate on your PAL.
Maturity Date and Outstanding Loan Risks: A PAL is due and payable upon demand by the lender, which means the lender can ask you to repay the outstanding loan balance at any time. If you fail to repay the outstanding loan balance, the lender may liquidate some or all of your pledged assets to cover the loan balance.
Potential Impact on Investment Strategy: A PAL may add an extra layer of complexity to managing your investments, as you need to consider the impact of your borrowing on your portfolio performance and risk exposure. You may also need to adjust your overall investment approach based on your PAL management.

Weighing the Benefits and Risks

Before applying for a PAL, you should carefully weigh the benefits and risks of this lending option and analyze your personal financial goals and risk tolerance. You should also consult with a financial advisor or investment advisor to determine if a PAL aligns with your investment strategy and meets your borrowing needs.

You should also consider alternative borrowing options, such as margin loans, HELOCs, or traditional loans, and compare their features, costs, and benefits with a PAL. You should evaluate the potential outcomes of each lending option based on market conditions and personal circumstances.

Comparison of Pledged Asset Lines with Margin Loans

A margin loan is another way of borrowing against your investments, but it has different features, costs, and risks than a PAL. Here are some key differences between margin loans and PALs:

Definition and Function: A margin loan is a loan from your brokerage account that uses your securities as collateral. You can use a margin loan to buy more securities or for other purposes. A PAL is a line of credit from a lender that uses your securities as collateral. You can use a PAL for non-purpose borrowing, which means you cannot use it to buy securities or pay off margin loans.
Interest Rates and Loan Value: Margin loans often have variable interest rates that are determined by different factors, such as LIBOR or the Federal Funds rate. Margin loans generally have higher interest rates than PALs. The loan value of your collateral for a margin loan is based on the type and quality of your securities. The loan value may range from 25% to 75% of the market value of your securities, depending on the brokerage firm’s policies and market conditions.
Borrowing Power: Margin loans can have lower borrowing limits than PALs, depending on the brokerage firm and your eligibility. Regulation T sets the minimum initial equity requirement for margin loans at 50%, which means you can borrow up to 50% of the purchase price of securities. However, some brokerage firms may impose higher initial equity requirements or lower borrowing limits for certain securities or customers.
Risk and Potential Consequences: Margin loans have potentially higher risks than PALs due to margin calls and liquidation of assets. A margin call is a request from the brokerage firm to deposit additional funds or securities if the value of your securities in the margin account declines below a certain level. If you fail to meet the margin call, the brokerage firm may sell some or all of your securities in the margin account without your consent or notice.

Comparison of Pledged Asset Lines with Home Equity Lines of Credit (HELOC)

A HELOC is another type of line of credit that is based on the equity in your home. However, it has different features, costs, and risks than a PAL. Here are some key differences between HELOCs and PALs:

Definition and Function: A HELOC is a line of credit that is secured by the equity in your home. You can use a HELOC for any purpose, such as home improvement, education, or debt consolidation. A PAL is a line of credit that is secured by the value of your investment portfolio. You can use a PAL for non-purpose borrowing, which means you cannot use it to buy securities or pay off margin loans.
Interest Rates and Loan Value: HELOCs often have variable interest rates that are based on a benchmark rate, such as the prime rate or LIBOR. HELOCs usually have higher interest rates than PALs but lower than margin loans. The loan value of your collateral for a HELOC is based on the amount of equity in your home. The loan value may range from 80% to 90% of the appraised value of your home, depending on the lender’s policies and market conditions.
Borrowing Power: HELOCs typically have lower loan amounts than PALs, depending on the lender and your eligibility. The loan amount that you can access through a HELOC is determined by the amount of equity in your home. The home must have sufficient equity to secure the loan.
Risk and Potential Consequences: HELOCs pose a risk to homeownership if you are unable to make monthly payments or repay the outstanding balance. Using your home as collateral means that you could lose your home if you default on the loan. HELOCs can also be frozen or reduced by the lender if home values decline or if you experience financial difficulties.

Four Scenarios Where a Pledged Asset Line May Be Preferable

A PAL may be preferable over other lending options in certain scenarios, such as:

Borrower has a significant investment portfolio with diverse assets: A PAL can allow you to leverage your assets to access funds without selling them or incurring capital gains taxes. You can use a variety of assets to secure your PAL, such as stocks, bonds, mutual funds, or ETFs.
Higher borrowing power needed than margin loans or HELOCs can offer: A PAL can provide access to larger loan amounts than margin loans or HELOCs, depending on the value of your investments. You can borrow up to $20 million in investments held in a pledged account, depending on the lender and your eligibility.
Desire to avoid liquidating assets or incurring capital gains taxes: A PAL can help you preserve your investment portfolio while accessing funds for personal or business needs. You do not need to sell your assets, which may prevent potential capital gains taxes and preserve your long-term investment strategy.
Flexibility in repayment terms and no set term for the line of credit: A PAL has a flexible repayment schedule that allows you to adapt your monthly payments according to your cash flow needs. You can pay more than the minimum amount or pay off the entire balance at any time without any prepayment penalties. There is no set term for the line of credit, so you can use it as long as you meet the lender’s requirements and maintain sufficient collateral.

Assessment of Lending Options

Before applying for a PAL, you should consult a financial advisor to determine the best borrowing option based on your personal financial goals and circumstances. You should also evaluate the risks, interest rates, and borrowing power associated with PALs, margin loans, and HELOCs. You should consider the impact of each lending option on your future financial planning and investment strategies.

Eligibility Criteria for Obtaining a Pledged Asset Line

To qualify for a PAL, you need to meet certain eligibility criteria, such as:

Investable Assets and Taxable Investment Accounts: You need to have at least $100,000 in investable assets and a taxable investment account. A PAL is not available for retirement accounts or business accounts.
Creditworthiness and Income: You need to have a good credit history and sufficient income to repay the loan. The lender may check your credit score, income, debt-to-income ratio, and other factors to determine your eligibility.
Collateral Quality and Diversification: You need to have high-quality and diversified assets to secure your PAL. The lender may assess the type, quality, and diversification of your assets to determine the loan value of your collateral.

Streamlining Pledged Asset Line Management with Kubera

Managing a PAL can be challenging and complex, as you need to keep track of various factors, such as the value of your securities, the loan value of your collateral, the interest rate on your PAL, the outstanding balance on your PAL, and the potential need for additional funds due to market volatility. You also need to monitor the performance of your investment portfolio and adjust your investment strategy based on your PAL management.

To help you with these tasks, you can use Kubera, a comprehensive net worth tracker that allows you to monitor and manage all your financial accounts in one place. Kubera is designed for HNWIs who have diverse assets across multiple platforms and want to gain a better understanding of their overall net worth.

How to Use Kubera for Pledged Asset Line Management

To use Kubera for PAL management, you need to follow these steps:

Sign up for a trial here and create an account.
Connect your bank and investment accounts securely using Kubera’s API integrations or manual data entry.
Mark some of your assets as investable for securing a PAL and track the value of the securities that you place in a pledged account.
Monitor the loan value of your collateral and the outstanding balance on your PAL and keep an eye on the potential need for additional funds due to market volatility or maintenance calls from the lender.
Track the performance of your pledged assets and your investment portfolio and identify potential adjustments to your investment strategy based on your PAL management.
View detailed reports and analytics that show the allocation of your assets by type or platform, the diversification of your portfolio, etc.
Make informed decisions regarding your flexible repayment structure, the need for additional collateral, if required, and the impact of your PAL on your future financial planning.

Conclusion

A PAL is a credit line allowing you to borrow against your investment portfolio. While offering advantages like access to funds without asset selling or incurring capital gains taxes, it presents certain risks requiring careful consideration.

Kubera, a comprehensive net worth tracker, simplifies PAL management, offering a clear view of your overall net worth, enabling informed financial decisions, and providing control over your diverse investment portfolio.