Rising stocks and low interest rates have given wealthy Americans a big advantage: cheap loans that they can use to finance their lifestyle while minimizing their tax bills.
Banks say their wealthy clients are borrowing more than ever before, often using loans secured by their portfolios of stocks and bonds. Morgan Stanley wealth management clients have outstanding securities and other non-mortgage loans worth $ 68.1 billion, more than doubled from five years earlier. Bank of America Corp. said it has $ 62.4 billion in securities-based loans, significantly more than its equity-backed credit lines.
Loans have special advantages besides flexible repayment terms and low interest rates. They allow borrowers who need cash to avoid selling in a hot market. Startup founders can monetize their stakes without losing control of their companies. The super rich often use these loans as part of a buy, borrow, die strategy to avoid capital gains taxes.
It’s just that the rich also borrow against their portfolios. When Tom Anderson started his career at Merrill Lynch & Co. in Cedar Rapids, Iowa, in 2002, many of his fellow consultants had only one or two securities-backed loans. Over the years, he encouraged more clients to borrow and noticed that colleagues were doing the same. Consultants at large firms now usually have dozens of outstanding loans, he said. Merrill Lynch is now part of Bank of America.
“You can buy a boat, you can go to Disney World, you can buy a company,” said Mr Anderson, who is now consulting with banks on managing the risks associated with these loans. “Tax breaks are amazing.”