The Value of Advice PDF
Strategic borrowing can be a valuable tool for long-term investors seeking to take advantage of short-term opportunities without hindering their ability to achieve their long-term goals.
In a low interest rate environment, borrowing funds to pay for large purchases or to cover short-term spending or investment needs can be more advantageous than liquidating assets. For example, consider a scenario in which an individual with a $20 million investment portfolio needs $2 million to purchase a new home. By taking out a mortgage, this individual can avoid liquidating invested assets, defer taxes and further benefit from compounding growth by staying in the market.
After 20 years, the portfolio of an investor who liquidated assets and paid for a new home in cash would be roughly $2.6 million smaller than the portfolio of an investor who opted to borrow those funds instead.
Interest rates are cyclical, and we encourage clients to take advantage of cyclical lows through the strategic use of leverage. We take a comprehensive approach when determining whether strategic borrowing is right for our clients. In addition to examining their assets and short- and long-term liabilities, we strive to understand who they are: What are their personal and family circumstances? How do their values, obligations and aspirations influence their long-term financial goals? What is their sensitivity to risk and what are their liquidity needs? Answering these questions allows us to devise a customized financing strategy that is aligned to their objectives and helps maintain growth in their portfolio.
We've found that by utilizing mortgages and investment credit lines to capitalize on opportunities without undermining portfolio principal, we are able to add up to 0.35% in additional wealth on an annualized basis.*
To read the full article, download the "The Value of Advice” PDF.
*Advice alpha is defined as the value of comprehensive wealth management that leads to better wealth accumulation and greater success of achieving financial goals and objectives over the life cycle of a clients' relationship. For further information about how BNY Mellon adds value, including an explanation of how the value we add is quantified, please see "Leading With Advice Overview and Active Wealth Value Proposition Discussion" (December, 2019), a copy of which is available at HTTPS://WWW.BNYMELLONWEALTH.COM/ASSETS/DOCUMENTS/LWA/LEADING_WITH_ADVICE_OVERVIEW.PDF or from your BNY Mellon Wealth Manager or relationship contact.
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