Broadridge looks to securities-based lending to extend its footprint in wealth management

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Broadridge is now offering securities-based lending to advisors and their clients as the company tries to grow its wealth-management business.

The fintech company has a new digital marketplace called the Wealth Lending Network where wealth managers can connect with a bank and access loans. Bancorp is the inaugural bank on the marketplace, and Broadridge is planning to add more over time.

The Wealth Lending Network addresses a growing demand among financial advisors for access to lending services for clients, but regulators warn that securities-backed lines of credit could be risky for investors.

Broadridge is perhaps best known for providing the infrastructure that underpins proxy voting services at public companies and mutual funds, but the firm has been expanding its presence as an advisor fintech provider. The Wealth Lending Network addresses a growing demand among advisors for securities-backed loans, says Michael Alexander, Broadridge’s president of wealth management.

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Michael Alexander, Broadridge’s president of wealth management.

Across Broadridge’s client base, the median book of SBLs grew 10% last year. But Broadridge’s modern, digital infrastructure can speed up lenders’ decision process and improve risk management, Alexander says.

“The current industry practice for processing SBL is highly manual, error prone and takes weeks — sometimes longer — for clients to access their funds,” he says in an email. “Our tool digitizes this process and enables clients to receive loan approval and have access to their cash anywhere from the same day to [two] days.”

SBLs allow investors to access cash by using assets including stocks, bonds, insurance and alternatives as collateral. Loans cannot be used to purchase other securities, and many firms don’t permit assets in retirement accounts to be used for collateral.

Payment terms are often more flexible than other forms of consumer lending and help advisors deepen client relationships and retain assets under management, Alexander says. Pricing is negotiated with the lender, but cost to advisors is minimal to encourage participation, he adds.

Broadridge isn’t the first to join the SBL party. Robo-advisor Wealthfront began offering them directly to clients in 2017, Goldman Sachs partnered with LPL on a loan program in 2018, and Envestnet includes SBLs in the credit exchange it launched in 2019.

“This product has become a cult favorite of ours because of how easy it is to use,” says Wealthfront vice president of communications Kate Wauck, though she did not respond to a request for specifics on its popularity. “I personally just used it to help out with additional liquidity needed to cover wedding and down payment costs. That’s typically what we see our clients use it for as well.”

Not everyone believes easy access to SBLs is a good thing. Both the SEC and FINRA have issued investor alerts about the loans, noting that market volatility can magnify potential losses. And in 2017, Morgan Stanley agreed to pay $1 million to Massachusetts regulators over charges that brokers were being encouraged to sell SBLs.

A market downturn could hurt people who take out SBLs in a similar way to those who took out exotic real estate loans before the housing market collapsed in 2008, says Christopher Bissonnette, a wealth advisor with Holistic Financial Planning, an independent firm affiliated with LPL.

Safeguards are in place to protect clients, Alexander says. Lenders maintain a conservative risk policy that is built with market volatility in mind to ensure that clients are not over-leveraged, and few sell-outs occurred either during the financial crisis or last year’s coronavirus-driven volatility, he notes.

“The vast majority of maintenance calls were resolved without hurting clients or making the advisors look bad,” he says. “This is a very safe business for the client and the advisor.”

Bissonnette hasn’t taken advantage of the loan program available to him though LPL, but his main concern isn’t the market — which has “just been on a tear” — it’s that few clients fit the key demographic, he says.

“It’s really for high net-worth people that are looking for some additional capital,” Bissonnette says. “Most people when they need money, they either don’t have it or it’s tied up somewhere in an illiquid investment. It’s a small market of people that are going to fit that window [for an SBL].”

Though most major custodians and wirehouses do offer access to SBLs, having a digital marketplace of lenders would make rates more competitive and beneficial for clients, says Jeff Farrar, the founder of Procyon Partners. Farrar has used the loans for decades and says they provide, “cheap, easy financing with no setup costs to improve clients’ liquidity.”

“The client needs to understand the risks, but I’ve found the larger and more sophisticated the client, the more they get using other people’s money,” Farrar says in an email. “Can you abuse an SBL? Yes, but like any tool, you have to use it wisely.”

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