Margin loans can bridge short term cash flow gaps, but aren't right for every need

Casey Bear |

With large enough balances in a taxable account, margin loans may be a wise option for high-net-worth individuals under certain circumstances.  Typically, you can borrow up to 50% of the taxable account value without any underwriting and by simply signing a margin loan application.  While the rate is variable, Cranbrook Wealth’s relationship with Fidelity Investments gives our clients access to very attractive rates that are significantly lower than the published rack rate. 

Recognizing the appropriate situations in which to draw a margin loan is an important part of a sound wealth management strategy, and at Cranbrook Wealth, we carefully evaluate individual client situation before recommending this option.

Some circumstances where a margin loan may make sense for a client include: 

1.     Corporate executives who are in stock sale blackout periods and need cash to bridge that short term gap.

2.     Clients who would need to otherwise liquidate part of their portfolio during a stock market correction. 

3.     Clients who need to bridge the gap between the purchase and sale of real estate holdings when the purchase closing predates the sale closing. 

While certainly a useful tool in the right circumstances, clients need to be cautious of the following: 

  1. The interest rate is variable and will rise as the Federal Reserve rate rises. 
  2. You will be unable to maintain a cash position while carrying an outstanding margin loan balance. 
  3. If you approach 50% of the account value and the market drops, you could be faced with a capital call.  
  4. If you hold the margin loan for a long period of time, it can have a substantial negative impact on your compounding portfolio returns.  

To determine if a margin loan might be appropriate for your short-term cash flow dilemmas, please contact a Cranbrook Wealth investment professional.