Issue link: https://resources.envestnet.com/i/1527631
Leveraging Both Sides of the Balance Sheet to Help Build Wealth l 4 Maintain Long-Term Financial Strategy Tapping into credit rather than liquidating securities to meet cash flow needs allows a client to keep their overall financial strategy intact. Studies have shown that over 90% of a portfolio's variance of investment return can be attributed to how assets are allocated across different asset classes. 2 A properly balanced asset allocation assists investors with achieving a level of growth needed to meet their financial goals. The inclusion of credit leverages existing assets and may eliminate the need to liquidate investments which could upset that balance. The interest rate environment and access to credit may also help investors avoid the opportunity cost of selling assets to meet a liquidity need. If the rate paid on the borrowed funds is less than the return other assets earn over the same period, the investor earns that return on a larger pool of assets while also meeting the liquidity need. By utilizing tactical borrowing to capitalize on opportunities without undermining portfolio principal, additional wealth could be earned over what would have been generated had assets been sold to fund a liquidity need. Enhanced service capabilities for new and current clients Wise usage of credit as a potential solution for cash flow needs is a unique service advisors can offer to both new and current clients and address investors' financial situations in a more holistic fashion. Whether it's a new client wanting to immediately invest funds and strategically borrow later, or a current client who is interested in cash flow for a second home or unexpected expenses, better tools can result in greater satisfaction and a heightened level of service. Cost Advantages Using credit to avoid the sale of securities also avoids the transaction costs clients would incur upon their sale, to say nothing of the forced loss they would take if cash flow needs crop up in an untimely down market environment. Clients also avoid current tax consequences, whether that be capital gains on long term holdings, which can be taxed up to 20%, or worse, short-term capital gains which are taxed at higher rates, up to 37% depending on the client's tax bracket. Potential Advantages of Strategic Borrowing 90% of a portfolio's variance of investment return can be attributed to how assets are allocated across different asset classes. 2 Gary P. Brinson, Brian D. Singer, and Gilbert L. Beebower, "Determinants of Portfolio Performance II: An Update," Financial Analysts Journal, May-June 1991, pp. 40-48. © 2023 Envestnet, Inc.