Investors Risk Big Losses with Loans Secured by Securities Collateral Accounts

The investment attorneys of Gana Weinstein LLP have been contacted by a growing number of investors who hold non-purpose loans secured by their brokerage accounts and then suffered staggering investment losses that have jeopardized their ability to repay the loan. In recent years all the major wire houses have begun recommending that their wealthier clients take out securities-backed lines of credit (SBLOCs). These loans that are often marketed by brokerage firms to investors as an easy way to cash out your securities accounts by borrowing against the assets in your portfolio without actually having to liquidate securities.

These lines of credit allow investors to borrow money using securities held in the investment accounts as collateral and allow the investor to continue to trade securities in the pledged accounts. An SBLOC requires typically requires monthly interest-only payments until repaid. Thus, when an investor losses a significant amount of their portfolio the investor has made very little progress in repaying the loan and may have few to no options to pay the loan back.

According to Fortune, securities lending is Wall Street’s hottest new business. According to the article brokerage firms such as UBS, Bank of America, Merrill Lynch, Morgan Stanley, Wells Fargo, and JP Morgan are recommending that their high net worth investors take out loans against their brokerage accounts at an alarming rate. The Wall Street Journal reported that securities based loans increased by 28% at UBS between 2011 and 2013. According to Fortune, a Wells Fargo advisor told the writer that the loans are so lucrative for the brokers that they refer to the money they make as their 13th production month. Another contact with Morgan Stanley reported that a regional manager would like to automatically send paperwork for loans with every single new account form.

However, the article noted that Morgan Stanley is actually behind other firms in the loan race because Morgan Stanley makes just 55 cents of loans for every dollar deposited which is far less than the 70 to 80 cents that rival banks make. In securities based lending Wall Street has found another product to push to bounds of reasonable advice through perverse compensation models that reward brokers for recommending their clients take outsized risks. For instance, in December Morgan Stanley apparently instituted a new bonus system for 2014 in which “advisers can earn up to $202,500 for loan growth, up from $127,500 in 2013.”  In addition, the firm’s CFO stated the firm’s goal was to triple their portfolio loan business from 2012 levels by 2015.

Given these disturbing trends what is The Financial Industry Regulatory Authority’s (FINRA), the industry’s self-regulatory watchdog, doing to protect investors? Recently FINRA issued an “Investor Alert” entitled “Securities-Backed Lines of Credit – It May Pay to See Beyond the Pitch” recognizing the conflicts between brokerage firms incentivized by “SBLOCs [that] can be a key revenue source for securities firms” and those same firms “placing your financial future at greater risk.” However, as with past Wall Street crisis and scandals, rarely read investor alerts is hardly and effective means to reign in abusive practices by skilled Wall Street salesmen working on commission.

The investment fraud attorneys at Gana Weinstein LLP represent investors who have suffered losses due to inappropriate advice concerning their investment accounts and securities loans. The majority of these claims may be brought in securities arbitration before FINRA. Our consultations are free of charge and the firm is only compensated if you recover.