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Many affluent individuals view credit as a wealth management tool, one that can help them take full advantage of business and investment opportunities as they arise. While investments and investment strategy represent core components of an individual’s wealth management plan, it’s important to remember that one’s personal balance sheet includes both assets and liabilities — and to ensure that adequate attention is also placed on the liability side of the personal balance sheet.

Effective integration of credit into the wealth management plan is essential and can support many objectives. For individuals, the role of credit is an evolving one, initially focused on funding an education, a vehicle, personal real estate — and, for many, debt consolidation and repayment. But for high-net-worth investors, over time credit can play a foundational role in both wealth creation and protection, and can help them take full advantage of business and investment opportunities as they arise.

“The effective use of leverage has been fundamental in the success and creation of wealth for many high-net-worth individuals — particularly for business owners,” says Ann Bowman, Head, RBC Private Banking Canada.

“We see more and more clients employing leverage strategies. Lending is an important part of our business, and we have expanded our capabilities and resources significantly in support of that over the last several years.”

Credit facilities for business owners

A business owner’s financial structure is often complex, and includes holding companies and trusts of significant value. Moreover, their needs are particularly complex and require specialized expertise and capability. The wealth planning team that works with the business owner needs to have a clear understanding of the individual’s wealth goals and their business interests, as they represent meaningful assets and sources of cash flow.

“I find it’s the entrepreneurial spirit and drive behind my clients that have them continuing to uncover ways to build assets and create wealth,” says Marian Major, Director, Credit Structures with RBC Private Banking Canada, who works with executives and business owners in Calgary.

“These clients think differently, out of the box, and seek partners who understand that way of thinking and can assist in achieving their goals.”

“It is essential that we start in the role of partner,” adds Major, “and that we explore the client’s goals and strategies and dig below the surface to ensure our understanding is complete.”

For business owners, the growth of their business is a key component of their wealth, but over time they can accumulate substantial personal wealth — often in the form of personal real estate and investment portfolios. They look for opportunities to add to their asset portfolio, mainly through diversification of investments, and may look for ways of leveraging their accumulated personal wealth.

Major advises that leveraging this personal wealth often makes sense for the entrepreneur. “It can effectively unlock value and create liquidity based on existing holdings — and often the financing is very efficient, cost-effective and flexible in structure compared to more traditional sources,” she says.

“In Private Banking, we offer the most flexible solutions; we look towards utilization of all assets in an advantageous manner to create lending facilities with the most fluidity. One of the ways we differentiate ourselves is by pooling collateral such as real estate, portfolios and cash surrender value on life insurance, and that can include multiple entities in the structure.”

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A full continuum of credit solutions

For the largest facilities, solutions may include lending options such as Banker’s Acceptances, LIBOR (London Interbank Offered Rate) facilities, foreign exchange and interest rate swap facilities.

Robert Doyle, Head of Credit Structures for RBC Private Banking Canada, explains that in working with high-net-worth clients, he and his credit team have identified core credit strategies that are typically employed by high-net-worth individuals and their families:

  • Managing cash flow and liquidity
  • Acquiring real estate
  • Diversifying assets/cash flow
  • Taking advantage of investment opportunities
  • Expanding a business
  • Managing taxes
  • Managing risk – enhancing risk/return profile
  • Reducing borrowing costs through consolidation

“We use these strategies to provide focused advice and develop customized solutions based on their specific circumstances and needs,” explains Doyle. “The strategies range from liquidity management to asset diversification and estate planning, particularly as they relate to the business owner: leveraging personal wealth for investment, risk management and tax planning.”

Tax is an important consideration. For many business owners, the purpose of leverage is for the earning of investment income and therefore it may be tax-deductible. As well, the use of liquidity lines as an alternative to the sale of assets may be advantageous from a tax planning perspective.

Credit should be considered in the context of overall risk management. Consider what level of exposure to floating rate debt is appropriate — if dealing with assets across multiple jurisdictions, borrowing facilities should potentially include a mix of Canadian and U.S. options. And consider, with your advisors, potential future credit and leverage requirements when establishing personal holdings and trust structures.

Note: Using borrowed money to finance the purchase of securities involves a greater risk than using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest as required by its terms remains the same even if the value of the securities purchased declines.

Putting the credit continuum to work for you

Consider the following: start with your overall wealth goals — and ensure the leverage you employ fits and supports those goals and strategies and is within your risk tolerance.

Ensure it complements and allows for achievement of your other wealth management and personal goals. For example, ensure the cash flow allocated to servicing loans will still allow you to meet your other goals, such as investment and saving for a child’s education.

Ensure that the amount of credit employed is conservative in that it supports a long-term investment horizon and can withstand volatility in asset prices and associated cash flow. “Your credit plan should work for you, not against you — and not keep you up at night,” says Doyle. “Ideally the proceeds of credit are used for investing and building wealth, as opposed to personal consumption.”

For many, particularly high-net-worth individuals, their ability to leverage represents an important advantage and, if used wisely, can work to their advantage in building and growing wealth. For some, today’s low interest rates may present a strong borrowing opportunity.

A team approach to the credit continuum

To employ these strategies, it’s essential to work with a team that looks at credit in the broader context of wealth management. Every high-net-worth individual’s situation is a bit different. Your financial position is, of course, important — but so is your investment strategy, investment horizon, what you hope to achieve through leverage and your risk tolerance.

A proactive, well-thought-out credit strategy can be an integral part of your wealth plan, and adaptable credit facilities can be available and ready to use whenever they are needed.

Note: While this article discusses a range of potential options and strategies, it is critical to consult with qualified advisors and tax and legal professionals to ensure your individual circumstances are properly considered and addressed and that options are best suited to your needs and goals.