Concentrated Company Stock Positions

I know how you feel.   I have two separate client accounts that are both over 1 to 1.5 million and both have over 50% in one companies stock (not the same company).  I have talked myself blue in the face about diversifying.  The both inherited the positions and I guess are sentimental about the stock.

The best I could do was get them to do a stop loss and a sell limit for the low and high end possiblities.   I also had them sign a letter stating that I had advised them of the risk, asset allocations....yada yada yada.  I expressed to them that this was to protect me in the event that the stock took a huge nose dive and I was unable to contact them since I don't have discresionary authority to sell (save their butts) and don't have the ability to do nothing all day but watch their stocks along with the other several hundred households that I have and  in case their heirs were to accuse me of not doing my fiduciary duty  etc.     I do the same thing for those clients who I have offered long term care insurance and who decline to apply.  That one has actually saved me one time from irate greedy children.

Basically  "I told you so, stupid !!!"   sign here please.

Wow.  That’s a tough sell.

Don’t forget to do it for regular insurance as well.

Oh I do.     Sometimes that actually gets them off the dime and become serious about applying. 

Insurance (life, long term, disability) is probably the hardest thing to sell because it is all about what we don't want to think about happening.  Much easier to put our heads in the sand and hope it all goes away.

[quote=Mike Damone]

This drives me crazy.  One of the major employers in town is a large utility company.  Every employee I have ever come across has invested 100% of their 401k into their company stock.  Before I can even open my mouth, they always say “I don’t want to hear about how I should diversify or about those Enron employees.”<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

I can’t get a single one of clients to diversify their 401k or the millionaire prospects to let go of their company stock.  Why should they?  For the last 30 years their company's stock has averaged 15% and actually went up during the market meltdown.  Heck, it even went up today.

Thanks for letting me vent.

[/quote]

I feel your pain.  Amazing, isn't it?  People think it just can't possibly happen to them.  I had a client who worked for ENE and he just plain got soaked.....and would have been hurt much worse but for my constant warnings about not putting too many eggs in one basket...

Mike Damone:

This drives me crazy.  One of the major employers in town is a large utility company.  Every employee I have ever come across has invested 100% of their 401k into their company stock.  Before I can even open my mouth, they always say “I don’t want to hear about how I should diversify or about those Enron employees.”<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

I can’t get a single one of clients to diversify their 401k or the millionaire prospects to let go of their company stock.  Why should they?  For the last 30 years their company's stock has averaged 15% and actually went up during the market meltdown.  Heck, it even went up today.

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Here's a "long shot" reply to those employees, but you'll need to do a little homework. First, find out the amount of stock holdings of all the directors and management. Then get a list of all the stock sold by this group within the last few years. No doubt, you'll come across a list of stock "sales" for the purpose of diversifying their holdings. After gathering this info, ask the employees if they believe that their management / directors are intelligent. (I assume they'll answer "yes", with such a run-up in stock price.) After they answer "yes", then show them this list of stock sales and say that, "even management / directors recognize the need to diversify their holdings".

By diversifying, you aren't necessarily sentencing their portfolio to a lower future return. (It's possible they could match or exceed the return they've received on the utility stock, just by diversifying.) However, you are reducing their risk which, as Martha Stewart says, "Is a good thing!" 

I would move on to people that appreciated your advice and listened to you…people like that will ruin your morale and run you out of the business. Find more prospects unlike them and create a business like that.

When I worked at ML, the guy who sat in front of me had been hired on just about 3 months before me.  Previously, he had spent 26 years at UPS, 20 of those in management.

He focused solely on UPS folks, and did VERY well.  But he faced the same issue.  Everyone had all there money in UPS.

People won't sell for many reasons.  For one, it's what made them rich in the first place.  For some, it truly is loyalty to the company they worked for all their lives (this is especially true at UPS). 

But another reason is actually a logical one...Cost Basis.

Many of those folks had $15 and $20 cost basis on (at the time) an $80 stock (non qualified).  To sell, aka diversify, would trigger massive tax consequences.

Things are a bit easier when its qualified money obviously.

The solution...learn about exchange funds (not to be confused with exhange traded funds). pre-paid forwards, and Net Unrealized Appreciation (NUA).  Those three things are your best shots at getting the non qualified concentrated stock money.

Have a great weekend!!

Wow, an informative thread ,  

Explain to them how their employer can restrict them from selling stock from inside their 401K plan/ESPP etc. if the employees have been exposed to non-public info.  Gather articles of local/large companies that have done this, GM recently did this… very powerful.  I explain it like this… so when your company annnounces it is headed for bankruptcy or some other bad news before they tell the rest of the world, you have no rights other than the right to watch your life savings get smaller and smaller.

***If the stock is a good one for it, do a covered call program to earn some fee and increase the income for the client. 



***You can collar the stock with writing a Call and purchasing a
Put…again, it protects the client and earns a little fee for your
service. 



***Exchange funds and prepaid forwards and the like are real good for larger positions (1 to 5 million). 



**If the stock is non-qualified, there are many strategies to gift it
to charities of their choice via a CRT and get 3 or 4 times the
dividend income they were getting. 



**They can gift it to family members via Private Annuities and other
vehicles, keeping the shares in the family, providing themselves
income, and getting it out of their estate for tax purposes.



***You can simply write protective puts on it as an insurance
policy.  Coordinating the cost of the put with the rest of their
money (ala the big bank balance they like to keep) typically helps
bring you more money to manage for income (to pay for the Put).



This is just a few simple strategies.  When we run onto this,
which is often, we have an entire presentation via PowerPoint that
walks through many of the options and reasons for implementing
them.  It typically results in us using one or more fo them, and
usually assures a referral.

I appreciate the great feedback.  Thank you everyone.

Good suggestions. I didn't think about the private annuity aspect.  Can I have your power point presentation

Just kidding.