“Don’t sell. Borrow against it.” Who is that advice good for?
You need cash for a roof, a tax bill, or a down payment. Your advisor has a better idea than selling: a line of credit backed by your portfolio. No taxes, low rate, your money stays invested. All of that can be true. The rest of it is in the loan agreement.
Consumer education, not investment advice. Paul Powell is not currently a licensed financial advisor.
A securities-backed line of credit lets you borrow against your investments instead of selling them. For the firm, it keeps your assets under management and earns interest on the loan. For your advisor, FINRA says it can mean a share of the loan’s fees plus fees on assets you didn’t sell. For you, it’s a variable-rate demand loan with your portfolio pledged as collateral, and in a bad market the lender can sell your holdings without asking you first.
Selling shrinks the account. Borrowing doesn’t.
Start with what happens when you sell. You need $100,000, the advisor sells $100,000 of your holdings, and the account they bill on is $100,000 smaller, for good. On a 1% fee, that’s $1,000 a year of revenue gone, every year after.
Now borrow instead. The account stays the same size. The fee keeps running on all of it. And a second revenue stream opens up: interest on the loan, paid to the firm’s bank or lending partner.
That isn’t my characterization. It’s FINRA’s. In its investor guidance on these loans, dated January 2024, FINRA says your investment professional “might be paid based on a portion of the fees generated by your SBLOC,” and that they “will benefit because you don’t have to sell assets in your account to pay for things with cash, which would diminish the potential fees and commissions that they could earn in the future.”
Paid on the loan, and paid on the assets the loan kept in place.
Here’s how the product works. A typical agreement, FINRA says, lets you borrow “from 50 to 95 percent of the value of the assets in your investment account,” depending on what you hold. You make “monthly, interest-only payments, and the loan remains outstanding until you repay it.” The rate is variable. It “can change every day,” and it typically tracks a benchmark like SOFR or prime plus a spread. You can spend the money on nearly anything except buying or trading securities.
The pitch usually leans on taxes, and the tax point is real. Borrowing isn’t a sale, so it doesn’t trigger capital gains. Under current federal law, assets held until death generally get a new cost basis equal to their value at the date of death, so gains never sold may never be taxed. That’s the logic behind “buy, borrow, die,” and for some wealthy families with large embedded gains it’s a legitimate plan. For a retiree borrowing to cover living expenses, it’s a loan that grows while the collateral moves with the market.
And this is the part I want you to sit with. If your portfolio falls far enough that it no longer supports the loan, you get what’s called a maintenance call. You must post more collateral or pay the loan down “within a specified period (typically two or three days).” If you can’t, “the firm may sell some or all of your securities.” FINRA adds: “Lenders often can make these decisions without giving you any notice.” These are demand loans, which means “lenders may call the loan at any time,” and some agreements let the lender raise the collateral requirement whenever it chooses.
So look at what the “don’t sell” advice can turn into. In a sharp decline, you can end up selling after all, at the bottom, on the lender’s schedule, maybe with the capital gains tax you were trying to avoid. FINRA says it plainly: “You could have to pay capital gains taxes on the proceeds from these sales.”
Completely. That’s the point.
Securities-backed lending is a lawful, regulated, disclosed product, and it can be a good one. Short-term bridge financing, a known expense with a clear payoff date, a borrower with plenty of collateral and no need to spend the loan down: those are the uses it was built for. The loan agreement and the firm’s disclosures lay out the rate, the collateral rules, and the right to liquidate. This site doesn’t cover crooks. It covers the ordinary, perfectly legal mechanics that quietly work against you, because those are the ones you’ll actually run into.
“Keep your money invested” is the one outcome every party to this loan wants, and only one of you is carrying the risk. The firm keeps the assets and earns the interest. The advisor keeps the fee base and may share in the loan revenue. You get the cash, and with it a variable rate, a margin-call clock, and a portfolio that can be sold out from under you in a bad week. That doesn’t make the loan wrong. It makes the advice to take it a recommendation from someone who comes out ahead either way, so weigh it that way.
Compare it to selling — honestly, in writing
Before you sign anything, ask for the comparison nobody volunteers: this loan against simply selling what you need. On one side, the tax you’d owe on the sale plus the advisory fee you’d no longer pay on that slice. On the other, the interest you’d pay over the realistic life of the loan at today’s rate, and at a rate a couple of points higher. Then ask the question the pitch skips: how far would the portfolio have to fall before you got a maintenance call, and what would be sold first?
Then find out how your advisor is paid. Compensation from the lending program belongs in the firm’s disclosures. Form ADV and BrokerCheck will show you what kind of firm you’re dealing with, and the twelve written due-diligence questions cover the rest. An advisor who recommends a loan should be glad to show you the math behind it. The full sequence is in the Method.
“Do you or your firm receive any compensation, directly or indirectly, from the securities-backed line of credit you’re recommending? Please show me, in writing, the total cost of the loan at today’s variable rate and at a rate two percentage points higher, compared with the tax cost of selling the same amount. At what portfolio value would I receive a maintenance call, how long would I have to meet it, and who decides which securities are sold if I can’t?”
If the best reason to borrow is that selling would shrink the account, whose account is that reason protecting?
Already have an advisor? Run the same six steps on them.
The Evidence-Based Hiring Method — six steps, the minimum criteria, and all twelve written questions with the answer guide. Built for hiring an advisor. It works just as well to audit the one you already have.
You may also be interested in
The Red-Flag Checklist
Every sales tactic and fee trick on one page. Check the ones that sound familiar — then count.
Take the checklist →Why your advisor wants all your money in one place
Consolidation is pitched as simplicity. The fee is a percentage of whatever is under management.
Read →What are production credits?
The internal scoreboard an advisor is graded on measures revenue produced, not results delivered.
Read →Advice that pays the advisor either way?
The Method gets the math — and the compensation behind the recommendation — in writing, before you sign. Six steps, free.