July 21, 2022

The Full Balance Sheet Approach

Adam Mortanian is the Co-Founder and Managing Director of PACT Capital Inc., a real estate mortgage, banking and capital advisory firm.

Grow Your Assets By Expanding Your Focus To Clients’ Liabilities

If you’re like most financial advisors, your main focus is on the asset side of your clients’ personal ledgers. After all, building assets under management (AUM) through a combination of stocks, bonds, mutual funds and other investment assets is the key to building client wealth and income for your firm.

But there are opportunities for delivering an unmatched client experience by focusing on overlooked areas of the client’s balance sheet. This specifically includes focusing on your clients’ liabilities, which are commonly referred to as real estate loans, or commercial and agricultural loans.

Taking A Full Balance Sheet Approach

What I like to refer to as a “full balance sheet approach” to wealth management from the perspective of a trusted advisor is an active, comprehensive relationship management strategy that focuses on both sides of the balance sheet, not just assets under management. Liabilities feed assets and good debt improves equity. By providing your clients with high-quality institutional borrowing advice and access to market-leading products, you can enhance their holdings because the liabilities are more tailored to their long-term plans.

It’s no secret that real estate investing is a tax-efficient way to build wealth. According to the U.S. Census Bureau, about six out of 10 Americans own some type of real estate. Late-stage baby boomers and the generations following them are especially active real estate investors.

However, the way these investors accumulate wealth is very different from their predecessors, which makes it hard for traditional banks to underwrite them for real estate loans. Instead of working at the same company for 30 or 40 years, for example, many of these investors are self-employed entrepreneurs earning money online via e-commerce or social media channels.

Establishing Strong Lending And Credit Partnerships

Advisors who establish strong lending and credit partnerships that sync with ever-changing borrower demand can capitalize more effectively to ensure that clients don’t move investable assets in search of real estate credit that fits their profile. However, most financial advisors haven’t been trained in real estate credit and lending.

Extending real estate credit is very different from managing assets. Real estate lending is tailored for every property and every borrower, and there are many factors that go into achieving a credit decision. Cash flow, collateral quality, location, condition, tenancy, vacancy, operating history and borrower credit history are just a few of these variables.

The Role Of A Real Estate Credit Lending Partner

Financial advisors are experts in managing client assets, and clients are experts in their specific areas of specialty. By working with a real estate credit lending partner, you can help your clients get the most out of the liability side of their personal balance sheet. This primarily helps ensure against “AUM flight,” which occurs when clients move their investable assets out of your firm to another firm that offers real estate lending. Teaming with the right partner effectively closes the back door on AUM flights.

Working with a real estate capital lending partner is especially beneficial for registered independent advisors (RIAs) who don’t have a traditional lending arm available to them like advisors at large banks do.

Meanwhile, if you’re limiting your real estate credit offering to just one bank, you are effectively limiting your flexibility if the bank is unable to extend credit to your client—potentially opening the back door to AUM flight.

Many banks are pushing advisors to cross-sell more products and services, which can sometimes force them to present clients with a credit solution that doesn’t fit their borrowing profile. An adverse outcome can often lead to a bad client experience and AUM flight in a worst-case scenario.

Differentiate Yourself And Offerings From Competitors

Taking the full balance sheet approach is an efficient way to differentiate yourself from other financial advisors in today’s increasingly competitive environment. It can help you win new business and retain existing clients by shifting the conversation beyond AUM to the rest of the client’s balance sheet.

Choose The Right Credit Lending Partner

To maximize the benefits of the full balance sheet approach for your clients and your firm, the first step is interviewing and choosing the right real estate credit lending partner. You should look for a partner who is a subject matter expert (SME) in real estate lending. The right partner will help you identify opportunities on the liability side of your clients’ balance sheets and then deliver the expertise, access and product knowledge as a partner in the relationship.

By partnering with a reputable, trusted and well-vetted firm, you can confidently offer real estate credit and advisory services without the risk of other advisors trying to poach your clients by offering real estate credit in exchange for moving their AUM. Your real estate credit lending partner will quickly become a valuable extension of your firm’s added value service offering.

Opportunities For An SME Partnership

Forming an SME partnership with a real estate credit lending partner can benefit financial advisors who work inside a bank as well as independent financial advisors.

For advisors working inside a bank, knowing what the bank partners can and can’t do from a lending perspective is important to managing client expectations. Talk with your team members to learn the parameters and bring them into conversations to help win business by focusing on factors outside of AUM.

For independent advisors outside of a bank, having a network of trusted industry professionals that can serve as a strong representation of the firm and provide the highest level of customer service along with a robust product set will further solidify client commitments. This helps make sure that the advisor is always the client’s first call when financial needs arise.

Adopting the full balance sheet approach to wealth management can be a win-win for both clients and the firm.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.


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