What is fully paid lending?
FPL is a securities lending program. You may already be familiar with this type of product, in which passive securities can be lent out for a fee. Over the course of the trading day, brokers lend and borrow securities to and from investors for purposes, such as hedging strategies, short selling, market making and collateral upgrades. The harder-to-borrow the security, the higher the fee.
For many years, securities lending was only available to large financial organizations such as pension funds, insurance companies and asset managers such as mutual fund companies or ETF providers. Now, fully paid lending is offered to individual investors. Already very popular in the U.S., it is growing in Canada.
The FPL program recently made a splash in The Globe and Mail, where personal finance columnist Rob Carrick featured it in his article, The latest in online broker perks for clients is basically free cash paid every month.
FPL offers a significant benefit: In addition to any income earned from fees, the client retains benefits of ownership of their securities. For example, they will continue to receive dividends. There is no cost or obligation, and securities can be called back at any time. Clients will receive 50% of the income earned.
In the words of Wellington-Altus Senior Investment Advisor Frank Mauro, "It's a win-win." Frank has already enrolled in the program for his personal portfolio and begun to pitch it to clients. "When I heard about it [FPL], I thought it was great...it's an additional revenue stream."
The first step: educating the client
Given that securities lending only recently became an option for Canadian retail investors, the level of awareness in the marketplace is low. Investors may miss out because they haven't heard about the program or don't understand its benefits.
Frank attests to this point. "I've never had a client call me and say, 'Is it possible for me to lend out my securities and get revenue for that?' It's the advisor who has to educate the client...it's just a question of spending that extra time. We show them the product and walk them through step-by-step. And the response is very favourable. It's great incremental revenue."
Frank notes that he talks clients through the option of enrolling in FPL during a portfolio review. He finds that this discussion is a good time to explain the program and answer questions.
Easy set-up and reporting
For clients who would like to participate in the Fully Paid Lending program, the enrollment process is straightforward. It's just a question of signing up the account. "There's no heavy lifting on the advisor's part," says Frank.
Once clients are enrolled, the client will be in a position to take advantage of opportunities if and when they become available. (Securities being requested for loan depend on what is in demand in the market; there is no certainty about which security will be in demand, or when.)
Reporting is transparent and thorough. Clients receive regular reports with all the details about their securities on loan, revenue earned, and collateral held to cover the loan.
"The reporting on the program is fantastic," says Frank, using his personal account as an example. "I receive an Excel spreadsheet every morning. I'm able to open it up and I can see exactly all of my positions that are lent out, how many shares, what the loan rate is, and literally I can see what I'm earning daily on it."
Stand out from the competition
National Bank Financial Inc., through its NBIN division, is one of the first in Canada to offer a Fully Paid Securities Lending program. This in turn gives advisors an "edge" on the competition by being able to offer clients an opportunity not readily available elsewhere.
"When you're in the family wealth business, every service differentiates you from your competition," says Frank by way of example. "It's one additional service that's great revenue for the client...it's another arrow in the quiver that differentiates this advisor from the next."
Securities lending is set to grow significantly in the Canadian market. Wealth managers in the NBIN network have the opportunity to position themselves ahead of the curve by alerting clients to this unique program.
Contact NBIN to discuss our Fully Paid Lending program today.