Why did we do this research?

A national representative sample of 1,046 investors with at least $50,000 on deposit at their brokerage firm collected by FINRA revealed that 15% of individuals carried a monthly balance on their credit cards, compared to 13% who had a securities-based loan.

Why is this research important?

Individuals who assume debt would be wise to explore all options and seek the most cost-efficient solution available. Compared to credit cards, securities-based loans are likely to be less expensive and, depending on how the proceeds are used, possibly tax deductible.

What did we learn?

Compared to credit card users, securities-based loan users were more likely to have higher levels of financial literacy and use a financial advisor. Also, the wealthier the individual, the more likely the use of a securities-based loan, suggesting that wealthier individuals are using debt strategically rather than to support excessive consumption.

What are the takeaways for clients?

Improving financial literacy (which in this study consisted of understanding key concepts such as the power of compounding, impact of inflation, and benefits of diversification) can help investors better manage both sides of their household balance sheet. Additionally, investors who use a financial advisor are at a significant advantage compared to their peer group, as they are likely receiving holistic advice that extends beyond investment selection.

Source: Sommer, M., Todd, T. M., & Lim, H. (2023). Exploring the relationship between investors financial literacy and advisor use with securities-based loans. Financial Planning Review, (6)3, e1166.