Take a holistic approach to year-end planning by aligning your investment strategy, liquidity needs, and long-term financial goals.
As the year comes to a close, it can be a good time to review your tax strategy, investment plan, and other key financial decisions.
“Year-end is a good opportunity to take a step back and look at the full picture,” says Trisha Knake, Head of Securities Based Lending with Wealth & Investment Management, Wells Fargo Bank, N.A. “Your wealth plan should support long-term growth while also accounting for the liquidity and cash flow needs that help fund your lifestyle, obligations, and future goals.”
Plan for cash needs before they become urgent
Most people face large, unexpected expenses from time to time, such as tax payments, home repairs, or major purchases. If you do not have enough cash available, you may be tempted to sell investments. That could create taxes or interrupt a plan you had been building over time. In some cases, it may be worth comparing the cost of borrowing with the cost of selling investments.
For example, you may need funds for a home renovation or tuition payment while holding investments you would rather not sell. Depending on your situation, borrowing against eligible securities may provide short-term cash and give you more time to decide how to fund the expense.
“Strategic financing can be a helpful way to avoid selling investments just to cover a short-term need, but it is important to look at the full picture first,” says Charles Doepken, National Lending Director with Wealth & Investment Management, Wells Fargo Clearing Services, LLC. “That includes the lending requirements, potential tax impact of selling appreciated securities, the anticipated benefit of remaining invested, and how comfortable you are with leverage.”
Strategic support for your loved ones
Family needs can come up unexpectedly or you may be planning to offer support for important milestones. For example, you may want to help with school expenses for children or grandchildren, help them get started with a home down payment or new business investment, or assist a parent with care needs. You may also want to offer this support while maintaining control over your assets, either by borrowing against them yourself or creating a pledge or loan structure where the family member is the borrower.
“Securities-based lending can provide funding flexibility while helping to maintain your long-term investment strategy,” says Doepken. “It can also make family conversations easier. For example, is the support a gift or something that will be repaid over time? Talking about that upfront can help everyone understand the plan and avoid confusion later.”
Keep in mind that securities-based lending has special risks and is not appropriate for everyone. If your pledged securities’ market value declines below required levels, you may be required to pay down your line of credit or pledge additional eligible securities in order to maintain it. If you don’t, some or all of your pledged securities may be sold.
Be prepared for future expenses
Even with a solid wealth plan, it’s hard to know exactly when a larger expense may arise. A job change, health care cost, or home repair can create a cash need before you are ready to adjust your investments. Without a plan, those moments can lead to rushed decisions. You may sell investments during a market downturn, use cash that was set aside for another goal, or take on debt without fully understanding the cost.
“Reviewing potential needs and expected expenses, along with your long-term investment strategy, gives you the advantage of holistic wealth planning to help you make more strategic decisions,” says Knake.
Taking a holistic approach to year-end planning
A year-end review conversation with your advisor can help you look at your investment strategy, taxes, cash needs, and long-term goals together. A financing solution may not be the right choice in every case but reviewing it alongside your other options can help you understand the trade-offs before you need to make a quick decision.
Talk with your advisor about whether strategic borrowing options could help support your long-term goals and provide flexibility for future needs.
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Wealth & Investment Management (WIM) offers financial products and services through bank and brokerage affiliates of Wells Fargo & Company.
Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.
Securities-based lending has special risks and is not appropriate for everyone. If the market value of a client’s pledged securities declines below required levels, the client may be required to pay down the line of credit or pledge additional eligible securities in order to maintain it, or the lender will require the sale of some or all of the client’s securities. Wells Fargo Advisors, on behalf of Wells Fargo Bank, N.A., will attempt to notify clients of maintenance calls but is not required to do so. Clients are not entitled to choose which securities in their accounts are sold. The sale of their securities may cause clients to suffer adverse tax consequences. Clients should discuss the tax implications of pledging securities as collateral with their tax advisors. An increase in interest rates will affect the overall cost of borrowing. All securities and accounts are subject to eligibility requirements. Clients should read all Wells Fargo Bank Priority Credit Line documents carefully. The proceeds from the Wells Fargo Bank Priority Credit Line may not be used to purchase or carry margin stock or pay down a margin account debit (talk to your financial advisor about additional restrictions on the use of proceeds). Margin stock is defined in Regulation U and includes, principally: (1) stocks that are registered on a national securities exchange or any over-the-counter security designated for trading in the National Market System; (2) debt securities (bonds) that are convertible into a margin stock; and (3) shares of most mutual funds. Securities held in a retirement account cannot be used as collateral to obtain a securities-based loan. Securities in a Wells Fargo Bank Priority Credit Line collateral account must meet collateral eligibility requirements.
