Helmut Boisch, PMP, is Dunham's Chief Operating Officer (COO). His work focuses on operations, client servicing, and Information technology.
Listen to this blog here
6:46
This article was written by Helmut Boisch and William Cassidy.
William Cassidy is a Senior Vice President at Customer Bank. His work focuses on wealth management, advisor banking, and lending solutions.
Key Takeaways:
Securities based lending allows investors to borrow against their portfolio to cover a tax liability — without selling a single position.
Selling to pay a tax bill can trigger capital gains, potentially compounding the original liability. Borrowing sidesteps that entirely.
The primary risk is a margin call — if portfolio value drops significantly, the lender may require additional assets or partial repayment.
Dunham's DEAL program offers lines of credit up to $10 million, with digital applications, decisions within 48 hours, and funding within 72 hours.
The key question is not whether securities based lending is good or bad — it is whether the cost of borrowing is lower than the cost of the alternative.
Tax season has a way of forcing big decisions.
A large liability hits. The instinct is to sell - liquidate something, cover the bill, and move on.
But selling means triggering capital gains - which means potentially adding to the tax burden you were trying to solve in the first place.
There is a cleaner way to handle it.
Securities based lending allows investors to borrow against the value of their existing portfolio —-accessing liquidity without selling a single position. The investments stay yours. The growth potential stays intact. And the tax bill gets paid.
Here is how it works, who it makes sense for, and what advisors and clients need to consider before moving forward.
What Is Securities Based Lending — and How Does It Work?
Instead of selling positions to raise cash, you pledge those assets as collateral. The lender extends a line of credit based on the value of your portfolio. You draw what you need, pay interest on the balance, and your investments remain yours.
Say an investor holds $500,000 in a diversified portfolio. Rather than selling $80,000 worth of positions to cover a tax bill, they borrow against the portfolio instead. The $500,000 stays invested. The tax bill gets paid. The only ongoing obligation is the interest on the $80,000 drawn.
The concept is relatively straightforward. But the implications - especially around taxes - are significant.
How to Pay a Tax Bill Without Triggering More Taxes
This is where securities based lending becomes particularly valuable - and where the alternative often creates more problems than it solves.
Consider Ed. He is sitting on a concentrated position with significant unrealized gains. Selling to cover a tax bill does not just solve one problem - it creates another. Selling locks in realized gains, potentially pushing Ed into a higher tax bracket and compounding the original liability.
Borrowing against those assets sidesteps that entirely.
The position stays open. No gains are realized. The portfolio keeps compounding. And the loan - typically at a lower interest rate than unsecured alternatives - covers the immediate obligation.
For high-net-worth clients managing large, appreciated portfolios, this is not a niche strategy. It is a core liquidity tool.
The Risks of Securities Based Lending Worth Understanding
Like many financial products, there are tradeoffs. And securities based lending is no different.
Advisors should understand these clearly - and walk clients through them before moving forward.
The primary risk is a margin call.
If the collateral (i.e., stocks) in the portfolio drops significantly, the lender may require additional assets or partial repayment. If not, they will force-liquidate your account.
Clients must understand that borrowing against a portfolio – even their own – does not insulate them from market volatility. But add a layer of liability to it.
There is also the interest cost.
Even at favorable rates, carrying a loan balance can have a compounding price. For instance, if the portfolio underperforms relative to the interest rate over the life of the loan, it can cause a negative effect.
Finally, there are loan terms.
Loan terms vary more than most clients may expect. Fees, repayment schedules, prepayment penalties, and draw conditions differ across programs. Reviewing the fine print carefully is important.
The question every advisor must ask is not whether securities based lending is good or bad for their client. But rather, whether the cost of borrowing is lower than the cost of the alternative - and in many tax scenarios, it is.
Key Factors Advisors Should Review With Clients
Before recommending this approach, a few things are worth working through:
Investment Outlook: Consider the potential future performance of your investments. If you believe they will continue to appreciate, keeping them might be beneficial.
Tax Situation: Calculate the tax implications of selling your securities versus the cost of taking out a loan.
Risk Tolerance: Assess your comfort level with the risk of a margin call and the potential for your securities to decline in value.
Cash Flow: Ensure you have the cash flow to service the loan and cover the interest payments.
How Dunham's DEAL Solution Works
Dunham’s securities based lending solution – the Dunham Easy Access Loan (DEAL) – is a flexible line of credit built specifically for this purpose and is offered in partnership with Customers Bank.
Here is how it works in practice:
Clients with eligible assets held in a Dunham Asset Allocation Program (AAP)account can use those holdings as collateral. Lines of credit are available up to $10 million. Applications can be submitted digitally - fully paperless with DocuSign integration - and decisions come back within ~48 hours. Followed by funding within 72 hours.
For advisors managing clients through a significant tax event (or any liquidity situation), that turnaround matters.
As we all learn, liquidity needs do not wait for a convenient window.
Conclusion
An SBLOC can be a strategic way to manage a tax liability without disrupting an investment portfolio. However, it requires careful evaluation of loan terms, investment outlook, and overall financial position.
Want to learn more about how DEAL works for your clients? Reach out to our Business Development Team or call 858-964-0500.
Frequently Asked Questions: Securities Based Lending and Tax Bills
Can I borrow against my investment portfolio to pay taxes? Yes. Securities based lending — also called a securities backed line of credit (SBLOC) — allows investors to borrow against the value of their portfolio without selling any positions. The loan proceeds can be used for any purpose, including covering a tax liability.
Does borrowing against my portfolio trigger capital gains? No. Borrowing against a portfolio is not a taxable event. Unlike selling investments, pledging assets as collateral does not realize gains or generate a tax liability. This is one of the primary advantages of securities based lending over selling positions to raise cash.
What is the risk of a securities backed line of credit? The primary risk is a margin call. If the value of the collateral portfolio drops significantly, the lender may require additional assets or partial repayment. Failure to meet those requirements can result in forced liquidation of portfolio positions. Interest cost and loan term variability are also important considerations.
Who is securities based lending best suited for? Securities based lending is most effective for high-net-worth investors holding large, appreciated portfolios — particularly those facing a near-term tax liability who want to avoid triggering additional capital gains through a sale.
How quickly can I access funds through Dunham's DEAL program? Dunham's DEAL program offers digital applications with decisions within approximately 48 hours and funding within 72 hours. Lines of credit are available up to $10 million for eligible clients with assets in a Dunham AAP account.
Disclosures
Customers Bank is the lender for securities-based lines of credit marketed under the Dunham Easy Access Loans program. Customers Bank is an independent lender not affiliated with Dunham Trust or its affiliate Dunham & Associates Investment Counsel, Inc. (“DAIC”), member FINRA/ SIPC. Customers Bank is a Pennsylvania State-chartered bank and a wholly owned subsidiary of Customers Bancorp, Inc. (NYSE: CUBI). Customers Bank is a member of the Federal Reserve System and Federal Deposit Insurance Corporation and is an equal opportunity lender.
Nothing herein is or should be interpreted as imposing an obligation on Customers Bank to lend. All lines of credit are subject to credit approval, verification, and collateral evaluation. Certain restrictions and terms and conditions apply. Products, rates, qualifications, and terms and conditions are subject to change without notice.
Dunham Trust is acting as custodian of the securities pledged as collateral by you, who may be a borrower or a guarantor, to secure borrower’s or guarantor’s repayment of amounts due under the securities-based line of credit extended by Customers Bank pursuant to the Loan Agreement.
Dunham Trust as custodian, holding the securities account(s) receives compensation related to the use of the securities-based line of credit. In connection with the initial referral of your application to Customers Bank and the ongoing administration of your securities account(s) serving as collateral for the loan, Customers Bank may pay an administrative fee to Dunham Trust that is based directly or indirectly on your outstanding loan balance with Dunham Trust. This means that there could be an incentive for Dunham Trust to recommend that you open a securities-based line of credit and for Dunham Trust to encourage you to maintain a larger loan balance. You should take this into consideration when evaluating the appropriateness of a securities-based line of credit and discuss any questions you have regarding these compensation arrangements with your Financial Advisor.
The proceeds from a securities based line of credit may not be used to purchase or carry (or repay debt related to the purchase or carry of) margin securities, which include: i) stocks that are registered on a national securities exchange, or any over-the-counter security designated for trading in the national market system; ii) debt securities (bonds) that are convertible into margin stock; and iii) shares of most mutual funds.
Borrowing against securities involves risk and may not be suitable for all investors or potential borrowers. A decline in the market value of the securities serving as collateral for your line of credit could require you to pay down your loan or pledge additional securities on short notice to avoid a forced sale of the securities in your pledged account(s). Furthermore, the sale of any of your pledged securities could cause you to suffer adverse tax consequences. These and other risks are described in detail in the 'Risks and Other Considerations for Securities Based Lines of Credit' disclosure document which is available upon request.
You should consult with your Financial Advisor and ensure that you understand and carefully consider these risks in determining whether a securities-based line of credit is suitable for your situation before proceeding.
Please review the Loan Agreement and all other documents contained in your securities-based line of credit loan package for terms and conditions governing your line of credit.
Neither Dunham Trust/ DAIC, Customers Bank, nor any of their respective representatives provide legal or tax advice. You should discuss potential legal and/or tax implications of pledging securities as collateral for a line of credit with an attorney or tax advisor.
Any statement concerning tax matters is not intended or written to be used and cannot be used for the purpose of avoiding penalties imposed on the relevant taxpayer. The taxpayer should obtain their own independent tax advice based on their particular circumstances.
All securities and accounts are subject to eligibility requirements. Securities held in a retirement account cannot be used as collateral for a securities-based line of credit. Dunham Easy Access Loans are not available in Hawaii, Iowa, Oklahoma and Oregon.
Please refer to the Risks and Other Considerations for Securities Based Lines of Credit' disclosure document, the Dunham Firm Brochure/ Wrap Fee Brochure and the Regulatory BI Disclosures for more information on pledging your Dunham AAP account(s).
*Certain complex applications may take longer.
Investment products are not insured by the FDIC, Customers Bank or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks, including possible loss of principal and fluctuation in value.
