Did you think financial advisors would be immune to the sub-prime crisis? Think again. Sure, you've heard that credit markets are tight. Capital is obviously still scarce at the big Wall Street firms, which have collectively written down over $100 billion in sub-prime mortgages and mortgage-related securities in recent months, and are expected to write-down more. That has trickled down to advisors at Merrill Lynch, Morgan Stanley and Smith Barney, who are feeling the pinch: Getting large loans for retail and institutional clients — whether its small-business loans, home-equity lines of credit or mortgages — has gotten a lot tougher and more expensive.

The banks themselves declined to comment, but people inside, or close to, the firms acknolwedge that loans have gotten pricier and more difficult to close. “There's no question that credit has tightened on mortgages, home equity loans and business lending,” says an official at one of the big banks. “It has gotten more expensive; that's the nature of a credit squeeze. It's priced right now at a rate that is not that attractive.”

“I've had to literally give business away,” says one top Morgan Stanley advisor. “Business that was formerly very easy, I've had to call a mortgage broker I know and say, ‘Hey, I can't do this, can you?’ It's not a big loss of revenue because I don't do a lot of mortgage business. But it is an opportunity cost,” he says.

For some advisors, tightening credit conditions carry a higher price tag: One top-tier Smith Barney advisor in the Southeast says a third of his revenue comes from corporate clients, so the difficulty he's had getting loans for clients is actually putting a dent in his business. “Two of my high-net-worth clients came in and wanted to develop a banking relationship with us, and Citi walked away,” he says. “One was an institutional client who wanted to open a facility in Brussels, and would have had to put up $5 million just to open the account. Another client wanted to purchase a large farm in South America, and Citi literally didn't even return the phone calls. Citigroup is rebuilding its capital. Let's face it.”

Many of the national wirehouse firms, and especially Merrill Lynch, have been making a big push into lending in the past couple of years, partly in an effort to make client relationships and assets stickier. But for now, that push seems to have lost some muscle. “That part of the business is definitely slowing down,” says a big producer at Merrill Lynch. “I think there's going to be a different way of doing business now. We're going to probably look a lot harder at these business loans and ask: Is it a valued relationship? Is it a deal we can do? The tests are going to be a little bit more rigorous.”

Data from the Federal Reserve's Senior Loan Officer Opinion Survey from January confirms that banks have been tightening their lending standards, increasing minimum credit scores and widening spreads of loan rates over the cost of funds.

Still, some deals are getting done, says the head of lending at another institution. “We're not back to booming times, but spreads have come back more in line with where they were before the compression of the last year-and-a-half.”

But with the banks taking a closer look at the way they manage risk in the aftermath of the sub-prime debacle, and more write-downs likely on the way, some think a tougher loan environment will persist for some time. “It's a bad time to get a loan,” says Inside Mortgage Finance publisher Guy Cecala, referring not to just mortgage loans, but the whole gamut of lending products. “Any kind of loan that isn't government-related has totally dried up. After that, you're really at the mercy of a bank as to whether they want to make the loan themselves and hold it in their own portfolio. And increasingly they don't want to; they've got limited funds.” Cecala doesn't see lending conditions changing until the middle of 2009 or even 2010. “The mortgage mess needs to clear up before anything else can be repaired. Once all the foreclosures have peaked, and we get an upturn in the housing market, there will probably be a loosening of credit terms for all kinds of products.”

That said, there are some lending products that are still rolling off the shelves. An official at one of the major firms who preferred to speak off the record, says securitized portfolio lending, or loans backed by highly marketable liquid securities that are then held by the banks as collateral, is still strong. “That's still an economical way for clients to get liquidity,” he says. “Financial advisors just have to be more creative to get liquidity these days.”