Big position in one stock

If these 3 siblings are adults, simply present them with the choices available to them (and the associated pros and cons) and let them decide. That way, if it blows up, they blame themselves.

Two words:  exchange fund

Hi Meno!  Haven't seen you in a while.

Are you referring to Exchange Traded Funds (ETFs)?

Starka,

Nope.

Exchange fund (aka swap fund):

For investors with large concentrated stock positions, very often with a low cost basis, exchange funds provide access to diversification by exchanging a single stock for a professionally managed portfolio. Because of the way an exchange fund is structured, the swap of one stock for a portfolio of stocks is not considered a taxable event—giving the investor diversification without capital-gains taxes.

OK, I know what you're talking about now.

I've never had a need for them, but as we have a lot of Publix employess in the area, I looked at them a while back.  I thought that they were only used for closely and privately held stock.

[quote=Starka]

Hi Meno! Haven’t seen you in a while.

Are you referring to Exchange Traded Funds (ETFs)?

I never claimed to know everything, Chump.  But one doesn't have to know much to know infinitely more than you do.

That's quite a photo on the Edward Jones website, by the way.

Wow.  Moneymom just wrote about a situation that I have as well except with a twist.  I have clients who have approx 850K in two trusts with the larger amount being in the credit shelter bypass trust.  Almost 70% of the portfolio is concentrated in one stock.  The twist is that we need to maximize income to provide for the benificary of both trusts who is in ltc.  There is no way the current position is providing enough income so this means some significant repositioning or systematic liquidating.

An exchange fund probably won't work for this situation since the are in need of immediate income and don't want to hold the exchange fund for the required time.  I have used that strategy just recently for another client who had a large position in one stock that was inherited with an extremely low cost basis due to some tricky legal work by the deceased owners lawyer.  My client inherited the stock over 10 years ago and would have had some big gains in any case. 

I have some ideas of what to propose to my trust clients, but would be interested to hear what you guys would do in this situation.

I know it may sound overly simplistic, but set a disciplined table with time and price targets.  That is, sell a predetermined amount of the stock the next time it reaches a certain price on the high side or the low side.  If the stock remains rangebound, sell it at market price at the pre-determined time.  This also helps family who may have some emotional attachment to the stock to gradually divest over a period of time.  It can also help in achieving a conscensus with various parties who interests and priorities may differ.  I’ve gone through this a couple of times myself.  I know it can be very difficult to strike a balance betweeen negotiating a compromise between all the parties, doing what is right for the client(s), doing right by the grantor of the trust, and maintaining your own impartiality and professionalism while not appearing to be foolish, short-sighted, greedy, or taking a sit-on-your-hands approach.  I wish you luck.

[quote=menotellname]

Two words:  exchange fund

I agree about giving them options but when presented with this situation, I always ask if you had nothing and I gave you $850,000 would you put it all in this stock?  I then point out Enron, Aol, EMC, Conseco. Etc.,  The reality is if things get bad for the stock you will get worried and so will they and they may not weather the storm and may sell low and then it will pop or even worse they will lose their savings.  I had a friend that worked at AOL watch his 5mm turn to 500k, (I know what you are saying if he was your friend why didn't you have his account, good question..) I also have a great client that had a huge position in EMC and I got him out at 80 and diversified, the stock is now 14 and he is forever greatful, if you do the right thing and explain the downside, I think selling the whole position will make sense, thats my 2 cents:)

[quote=rightway] [quote=menotellname]

Two words:  exchange fund

[/quote]

I didn't know you could do this with only $850K. 

If the position is on one account, you can possible do a cost free collar on the position, which secures the downside and puts a "sell" point, set up a loan on a the position and use the proceeds to diversify.  This gives liquidity, downside protection, a target sell point, and diversification. 
[/quote]

Rightway,

If you were going to go to all the trouble to do that, why wouldn't you just go ahead and do a Pre Paid Forward, which is basically what you are doing anyway.  You negotiate a price to sell the securities at a future date, say 3 years from now, keep the securites, and they loan you an amount (ex. 1MM of UPS gets you 850M of cash) so you can go into a diversified portfolio and put off paying the taxes.  In the mean time, you have a diversified portfolio that you receive dividends and upside potential AND still participate in the dividends and potential upside of the pledged stock.  We (ML) had a company that we did that through. 

It's basically what you are saying...only downside is, I think with ours (ML's) you might have needed a million to get to participate.

I can't remember the name right off, but I could get it on Monday if anyone is interested.

[quote=BankFC][quote=rightway] [quote=menotellname]

Two words:  exchange fund

[/quote]

I didn't know you could do this with only $850K. 

If the position is on one account, you can possible do a cost free collar on the position, which secures the downside and puts a "sell" point, set up a loan on a the position and use the proceeds to diversify.  This gives liquidity, downside protection, a target sell point, and diversification. 
[/quote]

Rightway,

If you were going to go to all the trouble to do that, why wouldn't you just go ahead and do a Pre Paid Forward, which is basically what you are doing anyway.  You negotiate a price to sell the securities at a future date, say 3 years from now, keep the securites, and they loan you an amount (ex. 1MM of UPS gets you 850M of cash) so you can go into a diversified portfolio and put off paying the taxes.  In the mean time, you have a diversified portfolio that you receive dividends and upside potential AND still participate in the dividends and potential upside of the pledged stock.  We (ML) had a company that we did that through. 

It's basically what you are saying...only downside is, I think with ours (ML's) you might have needed a million to get to participate.

I can't remember the name right off, but I could get it on Monday if anyone is interested.

Rightway,

I assumed that cost and minimums were why you were using the collar...I am not as familiar with them, but I'm glad that they aren't all that difficult, as you said, as long as you have the right stock (I assume a relatively low volitility stock)

If I come across such a situation, I'll drop you a PM and get your thoughts if that is alright?

Sure!

[quote=menotellname]

Two words:  exchange fund

[/quote]

Not a bad plan, but since their cost basis only goes back two years they may not be facing the unrealized gains problem that makes the cost of an exchange fund worthwhile. I'd want to know their tax situation and I'm not familiar with exchange funds that welcome amounts below $1M. There's also the concern that their particular holding isn't one the exchange fund is willing to take on.

Bottom line, it's worth investigating, but you really need more info.

Well, I seem to be getting a spurt of these types of scenarios recently.  In addition to the A/B trust people who need income and hold a large position in one stock, I now have a family who have inherited a very nice stock portfolio of which over 60% (approx 620K) is in one company.   An exchange fund (even if there is one that would take less than 1m in stock) is not in the works for either of these clients since they either 1) need immediate income or 2) don't have a cost basis problem. 

For the second client I am going to try to explain and recommend putting a collar on the position and gradually reducing the large position.   My A/B trust people who must have income is another story.  I am going to recommend tax free income investments in the B trust and reposition some of the A trust to also generate more current income but still leave a substantial amount of approx 200 to 250K in the stocks and mutual funds they currently own.   The OP was concerned about selling a large stock position all at one time. 

What other suggestions or what would you do?

Isn't this much more fun that bashing that mean old Edward Jones

Think about using a CRAT/CRUT or GRAT/GRUT.  Depends on what they’re trying to accomplish.  Sell the stock, take an income. 

Just tell 'em to sell it all with a market order.....get it over with.  

Figure the odds of a BIG negative event risk vs. the 15% cap gain tax. Sell at least enough to take out ENTIRE cost. Pay the tax and diversify away from any single event issues.

All of these collars and switch programs and everything else is a bunch of bullsh*t.  Have the sack to tell your clients that if you’re paying an ass-load of tax, there’s only one reason–you made an even bigger ass-load of money.  Then, get on with the rest of your life and theirs, and do the right thing.  I consider myself a pretty smart guy, but kind of a simpleton at times.  Maybe my clients are drawn to me for that reason.  I would not spend years and months screwing around and dancing with the same problem.  I went out for Chinese today with one of my clients.  My fortune cookie read, “Today is the first day of the rest of your life.”  Good advice for someone with an overly concentrated position.

Sooth in the past regarding HRB "I'll maintain my short position for clients and my own account, Thank You Very Much!"

How is that short working out for you and your clients, Sooth?

[quote=Soothsayer]All of these collars and switch programs and
everything else is a bunch of bullsh*t.  Have the sack to tell
your clients that if you’re paying an ass-load of tax, there’s only one
reason–you made an even bigger ass-load of money.  Then, get on
with the rest of your life and theirs, and do the right thing.  I
consider myself a pretty smart guy, but kind of a simpleton at
times.  Maybe my clients are drawn to me for that reason.  I
would not spend years and months screwing around and dancing with the
same problem.  I went out for Chinese today with one of my
clients.  My fortune cookie read, “Today is the first day of the
rest of your life.”  Good advice for someone with an overly
concentrated position.[/quote]



Sometimes that works and sometimes it does not.  Considering many
of these situations arive to us via referral from other professionals
such as CPA’s and Attorney’s, I think it would not be effective to tell
this client/prospect  "you’re paying an ass-load of tax, there’s
only one reason–you made an even bigger ass-load of money. " 
Just a thought…

[quote=Soothsayer]All of these collars and switch programs and everything else is a bunch of bullsh*t.  Have the sack to tell your clients that if you're paying an ass-load of tax, there's only one reason--you made an even bigger ass-load of money.  Then, get on with the rest of your life and theirs, and do the right thing.  I consider myself a pretty smart guy, but kind of a simpleton at times.  Maybe my clients are drawn to me for that reason.  I would not spend years and months screwing around and dancing with the same problem.  I went out for Chinese today with one of my clients.  My fortune cookie read, "Today is the first day of the rest of your life."  Good advice for someone with an overly concentrated position.[/quote]

Tax-prep business--down.  Digital business unit--down.  Financial advisory business--still bleeding red-ink all over the place.  However, (start applauding now) we made up for all of these underperforming units and then some through our SUB-PRIME LENDING BUSINESS.  It was a painful short on the QQQ with the NASDAQ at 4000 in 1998, too.  But, I didn't have to be perfect.  I just had to be right.  Time to double down?  Maybe not yet.  But, I will if the market momentum swings this dog to $29 split adjusted.  My thesis is playing out to perfection.  HRB keeps caving in to the The Street's expectation for churning out a number through a rather risky business built on the foundation of a real estate fantasy fueled by a sea of liquidity.  When the piper gets paid, I wll too.  I'm siding with the piper.

[quote=da public]

Sooth in the past regarding HRB "I'll maintain my short position for clients and my own account, Thank You Very Much!"

How is that short working out for you and your clients, Sooth?

[/quote]

I got my responses transposed.  So, this is my response to Rightway.  I appreciate your very tempered response.  I was trying to be inflammatory, and I always repsect your posts in these forums.  I think you're a real pro.  My point was that I think so many of us try to be too perfect.  We try to please the lawyer, the accountant and whoever else.  However, I haven't met a lawyer or accountant that I'm all that impressed with in the last couple of years.  I get tired of all of those a-holes getting to second, third, and fourth guess my work, without the same reciprocal professional courtesy.  Like I tell them all the time, "Lots of firms are hiring right now if you think that I have an easy job."

We all like to make analogies about our profession and doctors all the time.  Suppose you find out you have cancer.  Doctor #1 says: "I am going to recommend a course of chemo, followed by a course of radiation.  You need to modify your diet to whatever, and begin this herbal therapy.  I am also going to recommend a massage therapist, an aroma therapist, and a grief counselor for both you and your loved ones."  You ask, "What are my chances, doc?"  He says, "50/50."  Doctor #2 says, "I'm going to go in and cut the son-of-a-bitch out.  And, we'll go from there."  You ask, "What are my chances, doc?"  He says, "I got my chips on you, kid."  Some patients will prefer doctor #1.  Those are not my type of clients.  I'm more of a doctor #2 type.  And, a certain number of clients respect that approach.  At the end of the day, I work for the client--not their freaking lawyer or accountant.  I know, I know.  We're replaceable.  Go pick up a yellow pages.  Their lawyer and accountant are replaceable, too.  

[quote=Soothsayer][quote=da public]

Sooth in the past regarding HRB "I'll maintain my short position for clients and my own account, Thank You Very Much!"

How is that short working out for you and your clients, Sooth?

[/quote]

I got my responses transposed.  So, this is my response to Rightway.  I appreciate your very tempered response.  I was trying to be inflammatory, and I always repsect your posts in these forums.  I think you're a real pro.  My point was that I think so many of us try to be too perfect.  We try to please the lawyer, the accountant and whoever else.  However, I haven't met a lawyer or accountant that I'm all that impressed with in the last couple of years.  I get tired of all of those a-holes getting to second, third, and fourth guess my work, without the same reciprocal professional courtesy.  Like I tell them all the time, "Lots of firms are hiring right now if you think that I have an easy job."

We all like to make analogies about our profession and doctors all the time.  Suppose you find out you have cancer.  Doctor #1 says: "I am going to recommend a course of chemo, followed by a course of radiation.  You need to modify your diet to whatever, and begin this herbal therapy.  I am also going to recommend a massage therapist, an aroma therapist, and a grief counselor for both you and your loved ones."  You ask, "What are my chances, doc?"  He says, "50/50."  Doctor #2 says, "I'm going to go in and cut the son-of-a-bitch out.  And, we'll go from there."  You ask, "What are my chances, doc?"  He says, "I got my chips on you, kid."  Some patients will prefer doctor #1.  Those are not my type of clients.  I'm more of a doctor #2 type.  And, a certain number of clients respect that approach.  At the end of the day, I work for the client--not their freaking lawyer or accountant.  I know, I know.  We're replaceable.  Go pick up a yellow pages.  Their lawyer and accountant are replaceable, too.  

[quote=da public]

Sooth in the past regarding HRB "I'll maintain my short position for clients and my own account, Thank You Very Much!"

How is that short working out for you and your clients, Sooth?

[/quote]

I wanted to follow-up on this topic a little bit.  It is a perfect "Exhibit A" of herd mentality surrounding a widely held stock where only the "good news" is given consideration.  What was HRB's good news for Q4?  First, the business services unit (by far the smallest piece of the overall business at less than 5% of total revenues) was up.  No, make that way up--about 55%.  Second, mortgage origination volumes were up just short of 50% year over year.

Everything else pretty much sounded like bad news to me.  The number of tax returns done was almost identical to a year ago.  The average fee received per return was up slightly, but HRB signed more than 1000 new leases to the do the same number of returns?  Earnings on the company's mortgage portfolio fell almost 30% year over year due to the flattening yield curve.  HRB experienced a 6% loss of customers in its digital tax business.  And, it illustrious financial services unit (the one that started this discussion) "only" lost $13 million for the quarter.  Finally, if you look at HRB's guidance for 2006 of $4.35 to $4.65 per share, there's only one road to get there--another whopping increase in mortgage originations for 2006.  In fact, it looks to me on the surface that the mortgage business is projected to provide more than half of the earnings increase.  Please keep in mind that HRB does not loan money to the most creditworthy group of people.  That group is more likely to borrow from a well-known bank.  The real estate market looks about like the stock market in late '97 or '98.  It's overheated in a lot of the wrong areas, (Remember those cast-off "old economy" companies like Proctor & Gamble that did not participate in the run up?) but has not quite yet come to a mind-bogglingly foolish crescendo. Think about it.  When did Joe six-pack pile into the stock market?  When the money had already been made.  But that extra push of dollars gave the market most of its fuel in '99.  So, what's going on now?  Six-pack is stretching again.  Spending that last buck on real estate to make a killing.  He's so tapped out that Wells Fargo won't loan him money at 5.25%.  But HRB will step up at 8.125% to make the dream possible.  Go ahead, Da Public.  Invest in HRB now while the getting is good.  I'll call your bluff, and am prepared to match you chip for chip until you finally have to drop your cards.  That's how shorting works.  Like I said, you don't have to be perfect, you just have to be right.  But, do you really believe that "investing" in people with bad credit is a good investment.  I don't.  I think once bad credit, always bad credit.  And, surely our society has never seen anything even approaching the amount of money loaned in the past 3 years.  If HRB is going to be a sub-prime mortgage originator, then the P/E of the company should look something more like Countrywide, New Century Financial, Golden West, or Accredited Home Lenders--not a blue-chip growth engine.  Let me ask again: "Of the more than 50 analysts covering WorldCom just one year prior to coming clean, how many had sell ratings on the stock?  And what about Enron?"  My-oh-my what spectacular shorts those would have been.  I'm not suggesting anything of that magnitude will happen to HRB.  What I am suggesting is to look a little deeper into the numbers.  Think for yourself.  And don't just look at the numbers with your eyes, and reaffirm your expectations through glowing reports with your ears.  Get a little closer and take a good sniff, too.  Does it pass the smell test?

I have been using a lot of closed-end funds recently for income investors.  They seem to be giving good yields.  And, there are funds out there that are rated by firms as being appropriate for conservative investors (you’re typical retiree or bond investor).