Preparing for the Unexpected
One of the financial risks we face, but are often unaware of until we have a sudden need, is liquidity risk. By that we mean: the ability to get your hands on cash immediately.
Years ago a client of ours was struck by a brain tumor while traveling in Europe. The hospital would not perform the emergency, lifesaving surgery until they received $50,000, but the client did not have that much cash. Fortunately, they had previously signed a margin agreement. We were able to lend them $50,000 against their portfolio and wired the funds to the hospital within minutes of their call.
That incident has served as a constant reminder of why it is important to prepare for a liquidity need in advance.
With a brokerage account, there are two programs that can provide you immediate liquidity without having to sell anything. The first is a margin account, which allows you to borrow against the stocks or bonds in your account. The second is a securities based loan, known as a Loan Management Account at Merrill Lynch Wealth Management. This type of account also allows you to borrow against your portfolio but at either a variable or fixed rate of interest and for a flexible or fixed term. They usually cost nothing to establish, have no annual fees, and offer a better interest rate than a margin account.
Establishing a Loan Management Account is an excellent, inexpensive contingency plan allowing you immediate access to cash for sudden emergencies or opportunities without disturbing your portfolio. As with any debt, use it prudently. Some limitations and restrictions apply, and positions could be liquidated if your account equity falls too much. Discuss these with your advisor. The important thing is to establish one before you have a need. It might just save your life.
David Menashe is a Senior Vice President and Wealth Management Advisor, and Bruce Morley is a First Vice President and Wealth Management Advisor, for Merrill Lynch, Pierce, Fenner & Smith Incorporated, a registered broker-dealer, Member SIPC, and a wholly owned subsidiary of Bank of America Corporation. Investment products are not FDIC insured, are not bank guaranteed, and may lose value. (858.381.8113)
Photo by Andy Templeton