Episode 39: How credit can support your wealth plan

Oscarlyn Elder:

In both business and personal finance, access to credit can be a vital tool for building and protecting your wealth. I'm Oscarlyn Elder, Head of Investment Management at Truist Wealth, and this is I've Been Meaning To Do That, a podcast from Truist Wealth, a purpose-driven financial services organization. We appreciate you listening.

When you hear the word “credit,” you might first think about mortgages, car loans, or credit cards, but credit is a financial tool that has many different uses, including for people who have substantial assets. Today, we're going to be talking with my colleague, Elizabeth Greene, Wealth Lending Executive at Truist Wealth, about the role credit can play in your overall wealth management strategy. Beth, welcome to I've Been Meaning To Do That.

Elizabeth Greene:

Thank you, Oscarlyn. Happy to be here.

Oscarlyn Elder:

It's great to have you on the podcast. Beth, many times credit is associated with borrowing out of necessity. But when you talk with clients about using credit strategically, what do you mean?

Elizabeth Greene:

Strategic credit is incorporating the use of leverage in financial planning discussions to determine whether or not credit or debt can provide a benefit to the client's immediate or long-term financial goals. We're not making credit decisions in a vacuum or making credit recommendations in a vacuum, but really looking at the client's financial plan and asking questions such as, can you use leverage to avoid liquidating an asset? Does it make sense to pay cash for a purchase or finance it? What is the client's current and projected liquidity, and can they service debt? What are the tax considerations associated with what the client wants to do and how debt can help there? Those are some of the questions that we're looking at and strategically taking into consideration when making recommendations for a client. It can be as simple as having a line of credit in place to access money quickly, or putting in place a much more customized multiyear facility to support an estate plan.

Oscarlyn Elder:

What are some of the reasons that a client who could presumably find other ways to pay for something outright—why might they choose to borrow?

Elizabeth Greene:

At the end of the day, it really just gives them an option. It helps provide dry powder. A lot of times, clients may not want to liquidate investments, or it may be not advantageous for them to do so given the tax basis or given the liquidity or illiquidity of those underlying assets. A debt facility can provide leverage using the inherent value of those investments to avoid liquidating and going along with whatever the implications associated with liquidating investments may be. It also just gives the ability to act quickly. A lot of times, borrowers' investments or their cash funds may take a couple of days to access. So having a line of credit in place, they can go ahead and tap that money for whatever they want to use with it. So, really, it's that optionality and it's the negotiating power for having another tool at their disposal ready for them for both really their personal and business needs.

Oscarlyn Elder:

A couple of words really stuck out to me, the optionality. It gives people flexibility and optionality, and then potentially negotiating power because of the ability to potentially act quickly and not have to worry about how am I going to bring together the funds, but to make it easy and speedy, if you will. That really stuck with me. And I know as we're talking with clients, not everyone is comfortable with the idea of debt. It's not uncommon for us to talk with ultra-high-net-worth, high-net-worth clients, individuals and families who really have an anti-debt perspective. So, when you're talking with clients about the strategic use of credit, do you find resistance often? And if so, where does it come from?

Elizabeth Greene:

Yeah. People tend to have pretty strong feelings about debt one way or the other. They're either all in or they would never have debt. And a lot of times, those come from cultural or family beliefs, and sometimes it's just lack of familiarity with the product. They aren't familiar with the pros and cons, or maybe they only know about the negative side of credit. Perhaps in some instances, they've had prior negative experience or had a family member have prior negative experience with a debt solution.

So, really, our team of structured lenders works with the advisors and the wealth clients to help them understand what does a credit facility mean? What are the expectations of a wealth borrower in that facility? How can it be a benefit to the borrower? And then the structured lender will work with the advisor and the client to layer in that option in a financial planning scenario. I find that really seeing the numbers and putting the numbers behind it really helps overcome any objections that a client may have on the front end.

Oscarlyn Elder:

And in those conversations when you're working through that big-picture strategic view and you're having the discussion and understanding where there may be resistance or maybe not, how do you help clients determine which opportunities or priorities are a strategic fit for financing versus funding, often, directly? How do you walk clients through that process?

Elizabeth Greene:

It starts with asking questions. Fundamentally, what are the client's goals? What is the timing of the financing need, and what is the use of proceeds? What are the expectations for ongoing usage of debt facilities? We're looking at what are the borrower, and if it's a family, what is their current liquidity position, and what are their cash needs and expected cash flow in the future? So that helps us determine, is the borrower able to service the debt in the amount that maybe they are asking for. For wealth borrowers, they can borrow in their personal name or perhaps they want to consider borrowing in the name of a trust or another entity. All of these are considerations that we are taking into view when we're making a recommendation of whether or not a debt facility would be a good fit for the wealth client at that time.

Oscarlyn Elder:

So it's very importantly not a one size fits all discussion.

Elizabeth Greene:

No.

Oscarlyn Elder:

We're looking at a multitude of factors that may lead to a strategic decision around the use of credit—is that fair?

Elizabeth Greene:

Absolutely. You may have some debt products that may feel more standardized in terms. Those tend to be more on the consumer or personal use, but really when a borrower's or a wealth client's needs are complex, we can customize that facility by loan term, how much they're expected to pay each year. We can work with the client on interest rates, and maybe they want to bring on some additional guarantors to help support the strength of the facility. So, it is absolutely not a one-size-fits-all, and there's many levers that can be pulled to find the right solution.

Oscarlyn Elder:

Let's turn for a moment and talk about what we often see with, I'd say, families of significant wealth. And often, families of significant wealth, they really see themselves as stewards of the wealth, with the top priority really being around protecting that wealth for future generations. This is a very common theme that we see among our families who are clients of ours. What factors do you talk about with clients like this to help them define their risk tolerance?

Elizabeth Greene:

I'm going to go back to the same questions that we would ask an individual borrower. We need to understand what are the family's goals? What are their near-term goals? And, to your point, they are focusing on that generational wealth, so what are their goals for the family and generations to come? Back to the liquidity position, how much liquidity and cashflow are they expecting? Sometimes, the credit facilities require maintenance of a certain amount of liquidity, so that may be a factor for some of these large families to keep in mind. Who in the family will need to have the ability to access the financing? That's another consideration, or it may be gen two that may need one of the original family members to provide a guarantor to it. It goes back to those fundamental factors, maybe on a much more magnified scale, but it goes back to understanding those considerations and then layering in those scenarios to see what fits their risk appetite both today and in the future.

Oscarlyn Elder:

When you say “gen two,” you're talking about perhaps a second generation. So generation one may have created the wealth, and then generation two, typically a son or a daughter. There may be some interest in helping that generation launch their own business or acquire a property. And, Beth, we're working with families today that are talking about this with generation five, six, or seven even, depending upon how that family has stewarded that asset base. So you're pointing to some of that complexity and the dialogue that often happens with these families that involve multiple generations. Is that fair?

Elizabeth Greene:

That is fair, and a lot of times we want to make sure that all levels of the family that may be associated with that loan facility are aware of the financial considerations, the structural considerations. I mentioned some of those items, like how much is the loan going to amortize, or how much are we going to reduce that loan amount over the course of a year? Are there minimum liquidity amounts that must be held at Truist from a covenant perspective? Or who's even going to be a signer on the loan or who may be the guarantor? Those can be sticky questions to consider, and we want to make sure and partner with the advisor and the client's holistic team to make sure that all the family members are going in with full awareness of the pros and cons and all those other considerations tied to that debt facility.

Oscarlyn Elder:

The other thing that comes to mind, and you mentioned this early on, is understanding the cashflow, so what cash flows are expected that would ultimately repay or be involved with repayment of the credit facility, understanding the potential variability there. It sounds like it would be really important because it's a piece of the overall liquidity profile picture, but understanding the riskiness of the potential cash flows to service the credit is, I'm sure, a key piece also of how we're advising the families and helping them to think about how the credit facility could increase their overall risk profile. It’s just a part of the consideration, I would think. Is that fair?

Elizabeth Greene:

That is fair. You know, banks like to have their loans repaid, and so that is top of mind, particularly when we are looking at loan amounts, especially if a client has not had a debt facility before, having to think about preserving an amount of projected cash flow to help pay down a debt facility, may be something new to that borrower. Maybe in the past, particularly for those wealth clients that like to make investments, both personal and business, that's just an additional consideration that they may not have as a free open checkbook to make the types of investments they've had in the past. A lot of times, wealth clients of substantial assets have a lot of net worth, but maybe their liquidity is tied up in other places.

And so debt can help with that, as we mentioned at the beginning, but we need to make sure that we're not putting anyone in a bad position where we get a debt facility in place right now, but they're not able to service that in the future, either making those annual repayments or even paying interest. One of the things that we always keep top of mind is making sure that any of our recommendations would not put a client in a bad position, even if he or she thinks, "Oh yes, I need 50 million of debt." We are doing our own homework and diligence to make sure that we stand behind that recommendation and it's a good fit for that client.

Oscarlyn Elder:

That's very powerful, Beth. This is a very important tool. We want to use it responsibly, and we want to help the client be in the best position possible to achieve their goals, which is often a multigenerational goal.

Elizabeth Greene:

Absolutely.

Oscarlyn Elder:

We're looking to avoid downside surprises as much as possible. We want to cut off as much as possible, work to help the client be in the best position possible to hopefully achieve their goals. So very important insight there, and I think that helps us understand how high-net-worth individuals and families might look at credit strategically. When we come back in just a moment, we're going to consider how credit fits into an overall wealth plan.

Beth, we're not going to get into a lot of specifics about particular credit strategies today, because as you've noted before, there isn't a one-size-fits-all solution, but can you give us some examples of the lending tools available to people with relatively complex balance sheets?

Elizabeth Greene:

So, some of the lending tools available to people with complex balance sheets include debt facilities such as a line of credit. And when you think about a line of credit, that really is just a larger credit card facility. A client that wants to make a quick acquisition and doesn't have the necessary cash on hand, we can leverage their investment assets to help facilitate the acquisition and then look to put more permanent financing in place at a later date.

Another example of a debt facility is bridge financing, so maybe a client is in the process of selling their business, but has a financing need immediately before the sale goes through. We can put in place a bridge facility that is then paid back with proceeds from the sale.

Another common thing that we see from our wealth clients is life insurance premium finance. So even though a client may have the ability to pay for the premiums, there may be a tax benefit to finance instead of paying cash.

We oftentimes will use a term loan facility, so that is when a client will receive all proceeds from a loan upfront, and those are typically used if there's a more discrete purchase. Some common uses there would be investor real estate. So perhaps they are looking to diversify their investment portfolio through adding a piece of real estate. We can use a term loan facility to help facilitate the purchase of that property, or toys. We oftentimes will see our clients finance purchases or the building of planes and yachts, so that is another typical use of proceeds for a wealth client.

And then also just working with our investment professionals. High-net-worth individuals may oftentimes have concentrated positions, and debt can give them another solution to help mitigate the risk of that concentration and potential volatility in the marketplace. Those are some of the tools available in the typical loan facilities that are common for our wealth borrowers.

Oscarlyn Elder:

Hearing you describe the different facilities or approaches, if you will, many of those seem to be in the description of the use cases, primarily situational, in response to a specific need that may have arisen quite quickly. You really want folks to focus on using credit really from a strategic type of lens. Help us understand how you're thinking about the importance of credit fitting into the long-term wealth plan from a strategic perspective.

Elizabeth Greene:

Absolutely. Our recommendation is for clients to have a credit strategy in place or at a minimum, have a conversation with a credit expert to gain more familiarity with this type of solution. The more you prep in advance, the easier the execution will be when you need it, because you always need things quickly. Having a conversation to gain a better understanding of the types of loan solutions available to you, understanding what the interest rate environment may be, understanding what financial statements may be required to provide to the bank in order for us to analyze the full solution and our recommendation. Those are all representative examples of things that a client can do in advance in partnership with their advisor to really help ease the execution and help facilitate the speed of the execution of the debt facility when a need is in place.

Oscarlyn Elder:

Because it becomes very difficult when it's all reactive and responsive because often there is a tight timeframe for turnaround, the stress is elevated, and what you're trying to encourage people to do is just start the conversation, be contemplating it, be thinking about it proactively because it will be a more—usually it's a more pleasant experience, at least if you're not under that super-tight time constraint.

Elizabeth Greene:

A lot of times to underwrite a credit or to get approval for a credit, we have to analyze a wealth client's financial statements. And, given the complexity of those clients, that can be time-consuming in even trying to gather that, thinking about the borrower on the loan and how do they fit into the borrower's organizational structure? Do we have the right documents? Will the trust allow the ability to borrow? There's all these considerations that are underpinning a request that it does make sense to put in place in advance of having that immediate need.

Oscarlyn Elder:

And how do you and your team think about the appropriate amount and structure of credit to use for a client and thinking about the strategic needs?

Elizabeth Greene:

Sure. We really take a holistic approach. So, what is the use of proceeds? For real estate, we may recommend a longer-term facility. If it is a short need and maybe the client is expecting a liquidity event in the near future, then a line of credit may be more appropriate because the client can pay it down quickly and then have access to capital already at hand. Those are some of the considerations that we take and put in place to really make sure that we're making a thoughtful recommendation to our clients. There's not really one-size-fits-all in any of this.

Oscarlyn Elder:

Well, Beth, as a wealth advisor, you have access to all sorts of resources across Truist. Talk to us about how you work with other team members who may have specialty knowledge of a particular credit solution and why that collaboration is ultimately important for our clients.

Elizabeth Greene:

Yeah. We benefit from the vast resources that Truist has, and we do work closely with teams across the bank. We work closely with our relationship managers and the other wholesale groups, so we're advising their business clients on the intersection of their personal and business needs. A lot of times clients are very sensitive to interest rate movements, so we can work with our capital markets group to help understand, can we hedge some of that interest rate risk without committing them to a long-term structure or just our investment group. We partner closely with them as a borrower’s thinking about their investment strategy. So, if we know a client may want to use a debt facility down the road, we want to make sure that the investments that advisor is recommending will make sense for a debt facility. So, all of those groups are just representative examples of the resources that we can tap into for the benefit of the wealth client.

Oscarlyn Elder:

Thank you so much for highlighting the importance of that connectivity across our commercial bank, our corporate and investment banking efforts, if you will. Beth, let's take a moment because often with our wealth clients, estate planning and philanthropic giving are always top of mind, and we haven't talked about the role that credit might have in those situations. What have you experienced?

Elizabeth Greene:

Understanding the client's overall goals for estate planning and their philanthropic giving is important. Clients can leverage their investments to create liquidity to fund their foundations, or we can use a credit facility to help facilitate an estate planning transfer or help with potential tax payments. As we've talked about today, it really ties back to their financial goals. We're not making these recommendations in a vacuum, but going back to their financial plan to make sure that leverage can support not only their short-term goals, but also their long-term goals as well.

Oscarlyn Elder:

It sounds like a common theme here is communication and coordination, and I'll add understanding. Making sure that your advisors understand your goals so that they can help you make the credit decisions appropriate for your situation. We'll get some final thoughts, Beth, from you in a moment when we come back.

Okay, Beth, sum it up for us. What's the benefit to a high-net-worth client of including a credit specialist on their wealth team?

Elizabeth Greene:

So, credit experts work with the rest of the client's investment team to understand their unique needs, and we're providing a holistic recommendation using all available tools that a client may have at their disposal based on their financial profile. So credit is just another tool in their toolbox to help them achieve their long-term goals.

Oscarlyn Elder:

It's that very important tool in the toolbox. And again, we want folks to be thinking about that tool in a proactive way as a method that may help them achieve their long-term financial goals. That's what we want to leave folks with. Make sure you're having the conversation at least as proactively as possible. Before we wrap up, we have a tradition here on I've Been Meaning To Do That. We ask our guest, what's the one thing that you've been meaning to do that you haven't done yet and that you're willing to commit to doing now with our audience? So, Beth, what is your I've Been Meaning To Do That item?

Elizabeth Greene:

Okay. My item is really on brand, and I am going to go check my personal credit report to make sure that there's nothing unexpected here. In this day and age, fraud is pretty rampant, so it's always good to at least check your credit report once a year to make sure that there's nothing there that you wouldn't expect.

Oscarlyn Elder:

Beth, that is a fantastic I've Been Meaning To Do That item. You're the first person who's talked about that, and so hopefully you're also going to inspire folks who are listening to do the same because we just want to make sure that people are aware and really take control of that information and understand what's out there. It's a fantastic item. And Beth, I want to thank you so much for joining me today for this really insightful conversation around credit and using it strategically.

Elizabeth Greene:

Yep, my pleasure. Thanks for having me.

Oscarlyn Elder:

Beth, thank you so much for joining me today. And, listeners, I want to thank you as well. If you liked this episode, please be sure to subscribe, rate, and review the podcast and tell friends and family about it. If you have a question for me or suggestion for the podcast, email me at DoThat@Truist.com. I'll be back soon for another episode of I've Been Meaning To Do That, the podcast that gets you moving toward fulfilling your purpose, and achieving your financial goals. Talk to you soon.

Speaker 3:

Oscarlyn Elder is an Investment Advisor Representative, Truist Advisory Services, Inc.

Elizabeth Greene is a Registered Representative, Truist Investment Services, Inc.

Any comments or references to taxes herein are informational only. Truist and its representatives do not provide tax or legal advice. You should consult your individual tax or legal professional before taking any action that may have tax or legal consequences.