Investors who have accumulated significant wealth by owning large concentrations of a single stock may benefit from a diversified approach.
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Key Takeaway
A heavy concentration of a single stock can pose an outsized risk to portfolio performance if the stock’s value goes down. Diversifying concentrated stock can help your clients reduce overall portfolio risk.
Questions to Ask Clients and Prospects
Use these conversation starters to help gauge their level of understanding, meet them where they are and present the appropriate options.
Question
Do you believe your primary investment goals may be at risk given your current exposure to [XYZ] stock?
Why This Matters
Many business owners, corporate executives and other investors have accumulated significant wealth by owning large concentrations of a single stock – wealth that can benefit from strategic diversification. This question opens the door to discussing the benefits of diversifying concentrated stock positions in a tax-efficient way.
Sample Conversation Starter
“Do you believe your primary investment goals may be at risk given your current exposure to [XYZ] stock? We can explore the options for diversifying your position and reducing portfolio risk in a tax-efficient way.”
Question
If your concentrated position were replaced by cash overnight, would you buy back all of the concentrated position you had before?
Why This Matters
The "endowment effect" causes holders of a concentrated position to value it more highly and less objectively than if they did not already own it. This is similar to sellers of houses asking more than buyers are willing to pay — for the seller, it's a home, for the buyer, it's a house. A client who says they would not immediately repurchase their lost concentrated position acknowledges their concentration problem and accepts the value of diversification.
Sample Conversation Starter
“If your concentrated position were replaced by cash overnight (with no tax implications), what would you do? If you’d buy back all of the concentrated position, why? If you would diversify in this hypothetical situation, then why not now?”
Question
Can you share your equity awards statement with me?
Why This Matters
The confusing language and rules that accompany equity awards may disguise them as something other than compensation. Reviewing clients’ statements can start a conversation about using the tax code to prioritize exposures to employer stock and which ones clients should consider holding for the long term versus disposing of more quickly.
Sample Conversation Starter
“Can you share your equity award statement with me? One small step we can take is to explore how the tax code might make it more attractive to keep shares that offer an advantage, such as a lower purchase price, and sell others that are comparatively expensive or less attractive. After all, Uncle Sam can be a coach, not just a referee.”
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