For many advisors, the bane of their daily routine is not angry clients, volatile markets or overzealous regulators. Instead, it is being caught in the constant flow of “odd-lot tender notices” sent from publicly-held companies to stockholders owning less than 100 of the company's shares. Ignoring the missives may breach fiduciary duty, but filling your clients in on the, well, odds and ends cluttering your desk is a time-consuming, thankless task.
It doesn't have to be, though. You can get rid of these annoyances while doing yourself and your clients some good. Just get them to donate their odd-lot shares to charity. That way you'll help them cut their tax bill while you'll get a line on some very influential asset managers and the people who run charities, as well as other nonprofit organizations.
Take the Bull by the Horns
You can wait for that next notice to ruin your coffee break or you can get started finding the clients and charities that are most likely to benefit from your efforts. Just how much your clients will save in taxes will depend on their tax bracket, how they file and even which charity gets the shares.
Finding who among your clients will benefit the most is easy enough. Begin with a search for any Baby Bell shareholders. Many of them still own odd lots from the decades-old AT&T breakup. Otherwise, scan your collection of tender offers for all those two-digit holdings.
Within that group, there are likely to be some stocks that are better tax-saving candidates than others — shares that have appreciated in value and have been held more than a year are the best. Donating them means your client won't have to pay any capital-gains tax.
By the same token, not all clients will benefit equally. The higher the tax bracket, the more valuable the deduction. Just how valuable it is can be calculated using the Internal Revenue Service's Publication 526, “Charitable Contributions.” In any case, start with your big earners first. Clients who take the standard deduction (for 2006, the standard deduction is $5,150 for individuals, $10,300 for married couples filing jointly) instead of itemizing deductions that don't get any tax benefits.
Once you've put your list in order, it's time to contact your clients and start making your case for why this is a good idea. Explaining the situation fairly will show them the wisdom in donating the shares to a qualified charity. One thing to let them know is that as long as they hold on to their odd lots the companies are going to keep on pestering them into either getting rid of the shares or buying enough to get to round-lot status.
Your clients can, of course, submit their shares to the company via the tender offer, or they can buy enough from the company to reach round-lot status. But it may take weeks to complete the transaction, and there's no guarantee of a particular share price for the trade.
Selling the shares through you means the client may have to embark on a Byzantine cost-basis calculation and verification process, plus pay commissions and (maybe) capital-gains taxes.
Buying enough shares to get over the odd-lot status won't solve the cost-basis issue, and it's likely the client isn't particularly enamored with the company — or paying commission to buy more shares.
Describing the dilemma in this fashion will not only compel the clients to donate the petite positions they have with you, but it may also scare up some shares held directly by the clients or in their accounts at other firms.
One last financial consideration for your client is to let them know that not all charities will qualify for the maximum deduction allowed. They can check which organizations will qualify by going to irs.gov and downloading Publication 78, “Cumulative List of Organizations.”
The Best Intentions
Once the clients have agreed to your idea and picked a deserving group, the fun part begins. For the purposes of getting someone's attention, “I have money for you” is rivaled only by, “Your place or mine?” After you get in touch with the charity's person in charge of giving, explain your clients' intentions and ask if there is a standard procedure the charity has established for donors of stock.
The larger the group, the more likely it is that the shares will have to be sent to a national office. But many charities have no such resource, or prefer to handle things locally. If so, offer to establish an account for the charity at your office, so that the shares can be transferred and sold with as little friction as possible.
Don't expect to make your month on the commissions of shares sold for a charity. Give the group the biggest discount you possibly can, then subtly make both the client and charity aware of your actions.
Finally, ask the charity's officials if they might have other potential donors who are looking to clean out trivial portfolio positions. Offer to describe the process and advantages through a mailer or article in the charity's newsletter. Better yet, volunteer to sponsor a dinner for current and prospective donors. As the dessert plates are being taken away, the charity's director can list the group's accomplishments and needs, and you can explain the many tangible benefits of benevolence to the audience.
Yes, your clients have until the end of the year to donate shares of stock, and still get the deduction for 2006. But that check they're sending to the IRS this April 15th could've been minimized if you would have come up with this strategy last year. With their contempt for taxes at a high point, now's the time to tell them how pruning their portfolios today can help cut their contribution to Uncle Sam during the same time, next year.
Writer's BIO: Kevin McKinley is a CFP and vice president of investments at a regional brokerage and author of Make Your Kid a Millionaire — 11 Easy Ways Anyone Can Secure a Child's Financial Future. kevinmckinley.com