What firms allow securities-backed lending via Vanguard?

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What firms allow securities-backed lending via Vanguard?

Postby boggler » Tue May 07, 2013 4:55 pm

I may have some temporary, but substantial expenses over the next couple of years, and am wondering what firms will provide a line of credit against my Vanguard investment portfolio. I'm NOT looking for a margin account, since these typically have high rates, result in your own securities being lent to others with differing dividend tax treatment, and are designed for purchasing additional securities rather than acting as a line of credit for outside expenses. If I were to move my entire portfolio over to one of the major Wall Street firms, they'd be able to provide this for me, but I haven't seen any place that allows me to keep my assets at Vanguard and borrow against them without having to sell.

Anyone know of something that fits?
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Re: What firms allow securities-backed lending via Vanguard?

Postby pkcrafter » Tue May 07, 2013 7:15 pm

154 posts, but you don't seem to have any idea what Bogleheads are about. You want 100% stock and now you want to borrow against it. You seem to be pretty determined to get yourself into deep financial trouble. I don't mean to sound harsh, but you are so far off the track that some kind of comment is due.

With apologies,

Paul
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Re: What firms allow securities-backed lending via Vanguard?

Postby boggler » Tue May 07, 2013 7:19 pm

pkcrafter wrote:154 posts, but you don't seem to have any idea what Bogleheads are about. You want 100% stock and now you want to borrow against it. You seem to be pretty determined to get yourself into deep financial trouble. I don't mean to sound harsh, but you are so far off the track that some kind of comment is due.

With apologies,

Paul


I see it a little differently. I want to invest for the long-term in a diversified indexed portfolio. That's why I'm a Boglehead. However, I know that there will be one or two year periods (but I don't know when) where I will need a fair amount of money for a short period of time, and I will be paid back after that period. Rather than having to sell my long-term holdings when that happens, I'm trying to evaluate my alternatives. This is one of them.
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Re: What firms allow securities-backed lending via Vanguard?

Postby tfb » Tue May 07, 2013 7:47 pm

boggler wrote:If I were to move my entire portfolio over to one of the major Wall Street firms, they'd be able to provide this for me, but I haven't seen any place that allows me to keep my assets at Vanguard and borrow against them without having to sell.

If you keep your assets at Vanguard how does the lender monitor their value or sell them off if you default? If you convert the funds to ETFs and move it to somewhere the lender can control, then you can still invest in the Vanguard funds, except in ETF form.

I found this Schwab page through Google. Not sure if they still do it or what the rate is. Why not just get a HELOC?

http://www.schwab.com/public/schwab/ban ... _line.html
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Re: What firms allow securities-backed lending via Vanguard?

Postby boggler » Tue May 07, 2013 8:00 pm

tfb wrote:I found this Schwab page through Google. Not sure if they still do it or what the rate is. Why not just get a HELOC?

http://www.schwab.com/public/schwab/ban ... _line.html


That looks like a pretty solid option, actually. Minimums look high, but otherwise it's basically what I was looking for. Thanks!

I can't get a HELOC since I don't own a home.
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Re: What firms allow securities-backed lending via Vanguard?

Postby tfb » Tue May 07, 2013 8:11 pm

boggler wrote:
tfb wrote:I found this Schwab page through Google. Not sure if they still do it or what the rate is. Why not just get a HELOC?

http://www.schwab.com/public/schwab/ban ... _line.html


That looks like a pretty solid option, actually. Minimums look high, but otherwise it's basically what I was looking for. Thanks!

I can't get a HELOC since I don't own a home.

The revision dates on the forms show 2013. It's probably still being offered. I'm curious what the rate is. 3-month LIBOR (currently at 0.27%) plus unknown margin.
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Re: What firms allow securities-backed lending via Vanguard?

Postby Wolkenspiel » Tue May 07, 2013 8:18 pm

boggler wrote:I may have some temporary, but substantial expenses over the next couple of years, and am wondering what firms will provide a line of credit against my Vanguard investment portfolio. I'm NOT looking for a margin account, since these typically have high rates, result in your own securities being lent to others with differing dividend tax treatment, and are designed for purchasing additional securities rather than acting as a line of credit for outside expenses.


While I'm not suggesting you use a margin account for your plan, the interest rates at brokerages one would "typically" use for a margin account (e.g. IB) are rather low, e.g. 1.6% or less. I don't think IB cares what you do with the margin loan (although deductibility of the interest paid depends on it) and as far as I can tell there is no functional connection between IB lending your shares and margin. I'm sure others will comment on the "bogleheadedness" of your strategy.
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Re: What firms allow securities-backed lending via Vanguard?

Postby boggler » Tue May 07, 2013 8:23 pm

Wolkenspiel wrote:
boggler wrote:I may have some temporary, but substantial expenses over the next couple of years, and am wondering what firms will provide a line of credit against my Vanguard investment portfolio. I'm NOT looking for a margin account, since these typically have high rates, result in your own securities being lent to others with differing dividend tax treatment, and are designed for purchasing additional securities rather than acting as a line of credit for outside expenses.


While I'm not suggesting you use a margin account for your plan, the interest rates at brokerages one would "typically" use for a margin account (e.g. IB) are rather low, e.g. 1.6% or less. I don't think IB cares what you do with the margin loan (although deductibility of the interest paid depends on it) and as far as I can tell there is no functional connection between IB lending your shares and margin. I'm sure others will comment on the "bogleheadedness" of your strategy.


I actually contacted IB about this and they will lend out shares if you have any margin balance. What's more, sadly, they won't reimburse you for additional taxes incurred due to disqualification of dividends, if they do happen to lend out your shares. I'm not thrilled about that.
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Re: What firms allow securities-backed lending via Vanguard?

Postby rmelvey » Tue May 07, 2013 8:24 pm

The boglehead thing to do would be to have an emergency fund of ST bonds (perhaps with some I-Bonds) BEFORE you buy any stocks. You should have reserves already set aside to handle any unexpected expenses. It sounds like you are trying to use debt as an emergency fund. What if the emergency happens to be a collapse in the private sector debt market? You won't be able to tap it!
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Re: What firms allow securities-backed lending via Vanguard?

Postby MN Finance » Tue May 07, 2013 8:56 pm

Wait, you have 200k to invest, presumably in cash, now you want a loan? Eventually you're going to have to ask for a full breadth of advice instaed of goofing around.
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Re: What firms allow securities-backed lending via Vanguard?

Postby stan1 » Tue May 07, 2013 9:05 pm

OP, I'd recommend reading:
"The Great Crash, 1929"
By John Kenneth Galbraith

It's actually quite readable.
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Re: What firms allow securities-backed lending via Vanguard?

Postby boggler » Tue May 07, 2013 9:07 pm

MN Finance wrote:Wait, you have 200k to invest, presumably in cash, now you want a loan? Eventually you're going to have to ask for a full breadth of advice instaed of goofing around.


No goofing around here. I don't need the money right now, perhaps ever. That's why I want to invest it. However, if I do need it at some point in the future (temporarily), I don't want to have to sell at a moment's notice.
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Re: What firms allow securities-backed lending via Vanguard?

Postby inbox788 » Wed May 08, 2013 10:08 pm

boggler wrote:I may have some temporary, but substantial expenses over the next couple of years, and am wondering what firms will provide a line of credit against my Vanguard investment portfolio.


Interesting, Pledged Assets is what these are called. Didnt know that. You'd think because the loan is collateralized, the interest rates would be good, but due to the limited availability and specialized nature, I'd be more inclined to expect higher interest rates. Let us know what you find.

What type of expense is substantial and temporary? Medical? Vacation? other? More traditionally, a car loan would also fit the description, but interest rates on car loans are generally quite low, unless you have no income or bad credit.

Do you have bonds in your AA? Taking out a loan is akin to a negative bond, so that alters your AA, which may require a rebalance. Since you're paying it back, why not fund the loan yourself from the bond portion of your AA? If you don't want to sell equities, then funding from fixed income may be reasonable if the shift in AA is minor and you can live with it, and you'll restore it as you pay it back. We're you planning to make any changes to AA if you got a pledged asset loan? Probably not, so it's pretty much the same situation as if you took out fixed assets. Moreover, in the current low bond yield environment, I'm sure many people are veering much farther than this from their plans, for better or worse.

In some ways, it's similar to the should I take out a low interest mortgage on my house that's paid off to invest at higher potential returns.

Http://mortgage-x.com/library/pledged_asset.htm
http://www.bankrate.com/brm/news/mtg/19990603.asp
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Re: What firms allow securities-backed lending via Vanguard?

Postby boggler » Wed May 08, 2013 11:49 pm

Selling bonds would make a lot of sense, but unfortunately all my bonds are in my tax-advantaged accounts so I can't easily do this...
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Re: What firms allow securities-backed lending via Vanguard?

Postby BrandonBogle » Thu May 09, 2013 12:05 am

You could move your "bond" holdings to a CD at a bank and get a secured loan on the funds. Personally, I would find other avenues to finance what you need and I would adjust my spending to save as much of it as I could. Even just sticking a good portion in a decent rewards checking or Ally CD will get you the funds with a minimal fuss. You can then "repay" yourself by putting the money back in Vanguard.
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Re: What firms allow securities-backed lending via Vanguard?

Postby BrandonBogle » Thu May 09, 2013 12:06 am

Didn't see your prior post. I wonder if banks will do a secured loan on an IRA CD. Can't hurt to check.
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Re: What firms allow securities-backed lending via Vanguard?

Postby tfb » Thu May 09, 2013 12:19 am

BrandonBogle wrote:Didn't see your prior post. I wonder if banks will do a secured loan on an IRA CD. Can't hurt to check.

It's a prohibited transaction.
Pub 590 wrote:Pledging an account as security. If you use a part of your traditional IRA account as security for a loan, that part is treated as a distribution and is included in your gross income. You may have to pay the 10% additional tax on early distributions, discussed later.

http://www.irs.gov/publications/p590/ch ... 1000230855
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Re: What firms allow securities-backed lending via Vanguard?

Postby aude » Thu May 09, 2013 12:23 am

This is by no means a deadbeat move, as some in this thread are suggesting. I have helped very conservative clients with ten-figure (yes, in USD) net worths arrange lines of credit with pledged blue-chip stocks. The bank simply takes a pledge (lien) over the securities, including the ability to direct the broker to sell in the event of a default. Unlike some forms of collateral, they are easy collateral to liquidate, so long as the bank is careful with the advance rate (think LTV in the mortgage context). The key is for the bank and the broker to be comfortable with the documentation, and they may not want to do it for a "small" account.
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Re: What firms allow securities-backed lending via Vanguard?

Postby boggler » Thu May 09, 2013 1:10 am

aude wrote:This is by no means a deadbeat move, as some in this thread are suggesting. I have helped very conservative clients with ten-figure (yes, in USD) net worths arrange lines of credit with pledged blue-chip stocks. The bank simply takes a pledge (lien) over the securities, including the ability to direct the broker to sell in the event of a default. Unlike some forms of collateral, they are easy collateral to liquidate, so long as the bank is careful with the advance rate (think LTV in the mortgage context). The key is for the bank and the broker to be comfortable with the documentation, and they may not want to do it for a "small" account.


Yeah. I've definitely heard of very wealthy people using this strategy, and I know ultra high-net-worth advisors offer this as a feature of their services as well. I've just had trouble finding a low-cost alternative for a more typical size portfolio.
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Re: What firms allow securities-backed lending via Vanguard?

Postby indexfundfan » Thu May 09, 2013 1:40 am

Discussion of the Schwab product on FWF:

http://www.fatwallet.com/forums/finance/1268393/
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Re: What firms allow securities-backed lending via Vanguard?

Postby entraining » Thu May 09, 2013 7:42 pm

I posted a similar question a few weeks ago here: viewtopic.php?f=2&t=115046

I explored several different options: a line of credit backed by my securities and a traditional margin account. The line of credit that my bank offered me allowed me to keep my funds at Vanguard via the "pledged" account, but the bank wanted me to pay loan doc fees which came out to be too high for something I most likely would not need or would draw on once to repay immediately within a week or two.

The margin accounts I explored seemed like a good compromise for short term needs. Yes, you may have to deal with qualified dividend tax issues and Vanguard does not offer very low margin rates; however, for ease of use, it really can't be beat. Someone in this thread already mentioned Interactive Brokers, but my biggest issue with them was that they do NOT give you a margin call if you fall below the mandated threshold. In fact, IB will just start liquidating assets until you are back at the required threshold. At least with Vanguard there is a margin call which allows you to gather assets to get back to the threshold.
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Re: What firms allow securities-backed lending via Vanguard?

Postby inbox788 » Thu May 09, 2013 7:58 pm

aude wrote:This is by no means a deadbeat move, as some in this thread are suggesting. I have helped very conservative clients with ten-figure (yes, in USD) net worths arrange lines of credit with pledged blue-chip stocks. The bank simply takes a pledge (lien) over the securities, including the ability to direct the broker to sell in the event of a default. Unlike some forms of collateral, they are easy collateral to liquidate, so long as the bank is careful with the advance rate (think LTV in the mortgage context). The key is for the bank and the broker to be comfortable with the documentation, and they may not want to do it for a "small" account.


Is the Schwab program linked typical? What kinds of interest rates do you get with these stock-collateralized loans? How do the rates and durations compare with other collateralized loans like car loans, mortgages, HEL, HELOC? Are they more commonly fixed or floating rate? Aside from the straight forward expectation that the stocks will out perform the interest rate paid, is there a reason why someone would take out these loans instead of simply selling and buying back with repayment stream?
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Re: What firms allow securities-backed lending via Vanguard?

Postby tfb » Thu May 09, 2013 8:53 pm

inbox788 wrote:Is the Schwab program linked typical? What kinds of interest rates do you get with these stock-collateralized loans? How do the rates and durations compare with other collateralized loans like car loans, mortgages, HEL, HELOC? Are they more commonly fixed or floating rate? Aside from the straight forward expectation that the stocks will out perform the interest rate paid, is there a reason why someone would take out these loans instead of simply selling and buying back with repayment stream?

According to the linked FatWallet discussion

Code: Select all
    3.65% + 90 day LIBOR for $250k-500k credit line
    3.40% + 90 day LIBOR for $500k-1M credit line
    2.80% + 90 day LIBOR for >$1M credit line


90-day LIBOR is currently at 0.27%. Don't want to trigger capital gains tax due to short-term cash need.
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Re: What firms allow securities-backed lending via Vanguard?

Postby moolahpolist » Sun Sep 22, 2013 6:56 pm

First off, let me address the OP's question ... then let me respond to the haters out there that are giving the OP a hard time.

I use a product called an LMA or Loan Management Account at Merrill Lynch. These products are usually common at any full service brokerage. The product is more generically referred to as a pledged asset line (PAL). The rates get better with the larger the amount you pledge. I've pledged a couple of million and I have a rate of 1% over 1-Month LIBOR. The spread is entirely negotiable, and depending on the amounts you want to pledge, you can often make this a requirement to get your business.

I do not know of any brokers that will take the assets held at another brokerage as collateral for a PAL. To get a line like this you would have to move to another brokerage.

To those that are giving this guy a hard time, all I can say is that a PAL is a tool. And like any tool it has its place. I personally use it to invest in real estate (typically in the form of a NNN leases but sometime its a RE secured bridge loan) which compliments my other holdings. I've also found it a very helpful powerful alternative to mortgages and the like because of the amazingly low rates, no underwriting, and the ability to pay interest only if that is what you'd like to do.

OP: I think you are absolutely on the right track here. A PAL is an easy thing to setup and nice to have at hand if an investment or other need presents itself. Use it wisely and take the narrow minded extremist Boglehead's approach with a grain of salt.
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Re: What firms allow securities-backed lending via Vanguard?

Postby thehimalayas » Mon Oct 14, 2013 7:45 pm

moolahpolist wrote:I use a product called an LMA or Loan Management Account at Merrill Lynch.


Hi moolahpolist, does opening an LMA involve a hard credit report pull? Also, if possible, could you please share the address for payments by mail, as well as the account number format? I wanted to find out if my bill pay provider supports paying that account. Thank you!
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Re: What firms allow securities-backed lending via Vanguard?

Postby LadyGeek » Mon Oct 14, 2013 8:03 pm

Welcome! Here's the direct link: Loan Management Account®

I suggest you contact Merrill Lynch directly, as you don't know if the address and account number formats are customized for moolahpolist's account. Be sure to read the fine print carefully, which is in gray at the bottom of the page. It's easier to read if you highlight the text with your mouse. For example:

All LMA accounts require a brokerage account at Merrill Lynch, Pierce, Fenner & Smith Incorporated and sufficient eligible collateral to support a minimum facility size, or available line of credit, of $100,000.

...The securities or other assets in any collateral account may be sold to meet a collateral call without notice to the client, the client is not entitled to an extension of time on the collateral call and the client is not entitled to choose which securities or other assets will be sold. The client can lose more funds than deposited in such collateral account. The LMA account is uncommitted and Bank of America, N.A. may demand full repayment at any time.
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Re: What firms allow securities-backed lending via Vanguard?

Postby indexfundfan » Mon Oct 14, 2013 10:30 pm

"... Bank of America, N.A. may demand full repayment at any time."

I would think that a margin loan is more predictable -- at least you know when you might get a margin call (if the markets go south a lot).
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