Securities-Backed Lending: What Are the Risks?

One of the primary responsibilities and obligations of a stockbroker is to fully explain the risks of an investment opportunity and make suitable recommendations. The investment suggestions should align with your objectives for your securities portfolio. 

However, when a broker fails to provide the correct information and makes unsuitable recommendations, investors often lose money. But, why might a stockbroker provide misinformation and suggest unsuitable investments? Because doing so often generates commissions that help further their financial interests. 

This is often seen in many types of complex investments including securities-backed lending. Continue reading to learn more about what securities-backed lending is and what the real risks of such an investment are. 

What Is Securities-Backed Lending?

Securities-backed lending is the practice of taking out a loan using the collateral value of the securities in your investment portfolio. 

There are a number of reasons why an investor may want to purchase a securities-backed loan, but the most common reason is because it gives the investor access to a line of credit that can be used to make other purchases such as a new car, real estate, or another type of investment such as a business. 

The only restrictions on a securities-backed loan are the use of the capital to make payments on an existing margin loan or purchasing additional shares. These loans are particularly attractive to investors due to record low interest rates and the ability to avoid a taxable event. 

The Risks of Securities-Backed Lending

Brokerage firms are known to push securities-backed loans because they will make money on the interest of the loan. However, purchasing an SBL can be quite risky, and many investors are not properly warned of the risks associated with securities-backed lending. 

To start, securities-backed loans are on the rise, and with that, interest rates will continue to rise. Then, when the financial markets take a turn for the worse, brokers can issue a margin call. 

This means that the value of the securities you used as collateral for the SBL have diminished in value, and your broker is demanding that you deposit additional securities or money into your accounts to make up for the lower value of the securities you used as collateral.

If you are unable to deposit money or securities into this account, the brokerage firm could then turn around and sell your securities in order to make the money back. But, it gets worse. Once the broker sells your securities, you then have a taxable event on your hands, which will result in tax consequences on your tax return for that year. 

Get in Touch with a Securities Arbitration Lawyer

To learn more about how a reputable securities arbitration lawyer at Wolper Law Firm could help you recover the losses you endured after purchasing a securities-backed loan, contact our office to discuss your legal options. You can give us a call at 800.931.8452 or fill out the quick contact form included below when you are ready to get started on your case.