How securities-backed loans help investors avoid capital gains taxes

The stock market’s long bull run has created a bit of a quandary for those who have benefited from wise investments — cashing in can mean facing the scourge of capital gains taxes. 

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Banks with large wealth management divisions think they are in a distinct position to help. Kurt Niemeyer, the head of the lending solutions group at Bank of America’s Merrill, said securities-back lending — or loans using stocks and other assets as collateral — is just one of many “different levers to pull” to avoid a tax hit from stock sales.

Clients who sell stock also are possibly diverging from an investment plan that, if stuck to, could provide even greater returns in the future.

Like most brokerages attached to banks, Merrill has long allowed investors to take out loans against securities held in their trading accounts. But that ability has taken on added value with stocks on a bull run now just over three-years old.

“There are all sorts of reasons why you may or may not end up in a securities-based loan,” Niemeyer said. “But certainly I think that clients having and keeping and holding on to their securities, I think a big consideration is what would happen if they decided to liquidate or were forced to liquidate.”

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Securities-backed loans becoming mainstream, easier to arrange

Merrill is far from alone in seeing an opportunity. Competitors like BMO and Charles Schwab are seeking to use their internal banking and wealth management units to similar advantage.

Steve Kwei, the head of wealth management banking at BMO, said securities-backed loans — because of their easily valued collateral — can often be arranged faster than other forms of credit. 

“It’s becoming much more mainstream now,” he said. “And, frankly, it’s probably one of the more efficient ways of generating liquidity in the near term, versus if you were to apply for a mortgage or a complex loan. Typically, that process takes a little bit longer.”

BMO

Kwei said banks with attached wealth management units enjoy particular insight into clients’ total financial situations. That gives them a distinct ability to ascertain whether a securities-backed loan, stock sale or some other means of raising cash is the best way to go.

“We look at both sides of the balance sheet and are able to provide both investment advice and the banking platform,” Kwei said. “I think clients find that to be much more efficient versus going to different providers for all these different products.”

For banks, customer convenience is only part of the consideration. Securities-backed lending also helps to make client assets “sticky,” or less likely to be moved to outside firms.

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Avoiding the opportunity costs of stock sales

Kwei said clients will often find they need sizable amounts of cash for investments in things like commercial real estate, software or other business-related purchases. Those working with wealth managers who advise them to raise the money simply by selling stock may not realize the future gains they are likely forgoing by not staying invested. Securities-backed loans give them a means of avoiding those opportunity costs.

“So, for example, if a client had actually sold assets before the bull run, then essentially they’ve lost out on that investment opportunity,” Kwei said.

At Merrill, executives started its lending solutions group last year in a bid to provide more of Bank of America’s banking services to wealth management clients. The loans on offer include not only security-backed lending but also traditional mortgages and unsecured lines of credit.

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Taking out loans against real estate, art, aircraft, yachts

In 2025 alone, Merrill clients took on $10 billion in new loans. Niemeyer said investors with as little as $100,000 in investable assets can qualify for what the firm calls a loan management account, allowing them to take out securities-backed loans and other forms of credit.

Merrill also has a custom lending group for clients with $5 million or more in investable assets and net worths exceeding $25 million. Clients of any stripe can work with Merrill advisors to arrange securities-backed loans, mortgages and other types of basic lending. High net worth and ultrahigh net worth clients can obtain loans backed by commercial real estate or somewhat exotic possessions like artwork, aircraft or yachts. Or loans can be secured, meaning they come with no collateral.

“There are very few, I think, financial institutions out there that can kind of talk to clients through all of those different scenarios with different ideas on how to get there, so that they can maximize their hopeful wealth appreciation,” he said.

Niemeyer said one advantage of securities-backed loans is that the stocks, bonds and other publicly traded investments they use as collateral are typically easy to sell. That liquidity of the underlying assets allows the interest rates on securities-backed credit to generally be lower than on loans that are unsecured or tied to collateral that’s hard to sell.

Clients clearly come out ahead if they put the money they borrow into something offering an even greater rate of return.

“So if you’re borrowing against your securities to invest in a business, what’s the return on that?” Niemeyer said. “When you start to add on stuff like that, that gives you a really true kind of return on capital. And I think that’s generally been a really good trade for a while now.”

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Schwab, others allow alternatives to be used as collateral

Many wealth managers are now looking beyond standard stocks, bonds and other publicly traded securities and offering loans that use various types of alternative assets as collateral. Both Niemeyer at Merrill and Kwei at BMO said their firms regularly lend against hedge funds, while Niemeyer said Merrill will write loans against assets like private equity in certain circumstances.

Much the same push is coming from firms that have their origins in wealth management. Speaking at his firm’s annual institutional investor day on Thursday, Charles Schwab CEO Rick Wurster said Schwab is now using its internal bank to offer alternative-backed loans through the network of independent RIAs it now provides various custody and clearing services to.

Wurster said one of the most common requests he hears from advisors in Schwab’s support network is, “‘I’d love for you to do more lending to my clients, so I don’t need to introduce a bank.'”

For executives in the wealth management departments of big banks, the goal is often the opposite.

“So, for example, if it’s an RIA, their main focus is often just providing investments and investment advice,” Kwei said. “So if their client wanted a securities-based loan, they would have to go to another provider.”