In their never-ending pursuit of profit, investment banks have increasingly turned to wealth lending. Wealth lending, also known as asset-based lending, differs from traditional loans in that t he loan , or line of credit, is secured by inventory, accounts receivable or other balance-sheet assets . Many are secured by mortgages and stock portfolios, and a growing number are backed by valuables like classic cars, wine or art collections, even stakes in hedge funds or private equity funds.

While the banks say these loans are "safe" because they're backed by collateral and often a personal guarantee, we're reminding investors that on the whole, banks do not have their client's best interests in mind and they should, at a minimum, proceed with caution.

To be clear, we understand that loans are often a necessary way to get a new or growing business off the ground, and loans are an unavoidable part of most real estate transactions. However, if a banker "advises" you to look at an asset-based loan you need to understand what that means. Essentially, it's a leveraged loan; they will lend you money against your own money and charge you fees for that privilege. Think of it like borrowing against the equity in your home, a pretty common practice in the mid 2000's and we all know what happened after the housing market collapsed.

If you borrow against your equity portfolio and stock prices retreat (which, at today's valuations is not out of the question) you may be stuck. And therein lies the beauty of wealth lending ---    for the banks. The only way to make loan payments or unwind the loan all together, will be to sell your assets, and in a down market, that means losing your loan AND locking in your losses. Alternatively, if you ever wanted to get out of your loan and equities have gone up, you'll be stuck paying capital gains taxes just to get out. Banks are betting that by locking up your assets in this way they will stabilize their profits during any downturn.

According to the Wall Street Journal, wealth lending at Goldman Sachs has quadrupled in size since 2012 to $29 billion. Morgan Stanley's wealth-loan balances are up 420% in the same time period to $79 billion.

In certain situations asset-based lending may be a viable choice, but traditional bank financing will likely provide you less risk and more flexibility down the road. Either way, we recommend three things: 1. Be wary of your banker's "advice" 2. Understand all your options and how they might play out in the future and 3. Proceed with caution.