Clients' Employee Stock
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What are your guys' opinions on your clients' employee stock holdings? I have a client that is 57, retiring in 2 years, has a $1.5MM net worth and $400k in his company stock. The company stock has done 40% YOY and a 10 year number of over 17%. The company isn't feeling the effects of the economy right now and has been positive almost every year.
He has the opportunity to diversify out 25% of his ESOP. I know there is always Enron and Bear Stearns to think about, but the client believes in his company and they do seem to be knocking the cover off the ball.
What do you guys think about these situations?
My dad worked for a company like that. Well known company who had a great track record of rising dividends and an ever escalating stock price. Looking back at 1990-1999 in his company the stock split 3 times, each time hitting a new high. He retired in 1999 taking an early buyout offer. Stock price when he retired was in the low $50’s. 6 months later it was trading for $26. Fortunately for him we had done as Indy indicated and diversified when he retired. He still owned some shares of the company, but it was something like 500 vs 6000.
I would tell my clients to liquidate at least a portion of their shares. At least down to 10-15% of the overall portfolio. And even that is a little high for my own personal comfort.This is how I explain it:
Bad things can happen to ANY company, no matter how great it is. Sometimes there are funny things taking place within the corporation that we can't see, such as Enron and WorldCom -- both were great companies with great returns and great histories, but they imploded. Then there are companies that are doing what everyone else in their industry is doing, but it ends up being the wrong thing to do - Countrywide Mortgages and a lot of the banks and brokerage firms are in that boat right now. The numbers looked great until suddenly they didn't look so great and it was too late to jump ship. The third thing that can happen is purely outside our ability to foresee, such as a drunk ship captain hitting a rock in Alaska and spilling some oil -- the effect on the price of Exxon stock and the cost to the corporation was breaktaking. And it affected the bottomline of for years. Similarly, when Tylenol was tampered with and people died, the stock price and profitability of Johnson & Johnson was greatly affected. Bottomline - you never can tell where there could be a problem and the only way to protect yourself is not to have too much in any one company.I deal with this ALL the time. A large F500 company in may area has done what you are referring to, Snags. I have many clients, friends, prospects, etc. that have 100% (not a typo) of their 401K in company stock. Their rationale? It’s done so well for so long…(true), It’s what has made me so rich…(true, $1/$1 up to 6% in company stock), it’s the only thing not going down in this market or the last bear market (true sort of, and true sort of…it’s gone up in both markets, but not the only thing). So having the diversification argument is not unlike having the LTC insurance conversation, the “go get a will” conversation, etc.
It is SO hard, but I bascially tell people this...."you are GOING to make less money doing it this way. But think of it as the cost of insurance on your retirement income. If you stay concentrated like this, you have a 75% chance of doing about a 15% return every year for the foreseeable future (I am just making up numbers). However, if this stock gets cut in half (which is entirely possible - it happened once!), your chance of losing half your retirement portfolio is 100%. If we diversify, let's see what your risk is.....(show them a hypo on any portfolio you are going to use, highlighting the "worse case" years, typically 2000-2002). I also tell people that I am only going to plan for their "diversified portfolio", because you never know what can happen with a single investment. It could double, or it could go bankrupt, you just don't know - so let's know what will heppen with jsut the rest of your portfolio. Tough conversation. Especially when the 10% you end up leaving in company stock doubles in 18 months, and the rest of it, well, doesn't.[quote=snaggletooth]
What are your guys' opinions on your clients' employee stock holdings? I have a client that is 57, retiring in 2 years, has a $1.5MM net worth and $400k in his company stock. The company stock has done 40% YOY and a 10 year number of over 17%. The company isn't feeling the effects of the economy right now and has been positive almost every year.
He has the opportunity to diversify out 25% of his ESOP. I know there is always Enron and Bear Stearns to think about, but the client believes in his company and they do seem to be knocking the cover off the ball.
What do you guys think about these situations?
[/quote] One other thing I tell people on this....sometimes a stocks performance has NOTHING to do with the fundamentals of the company. Look at 2000-2002. Do you really think GE or P&G or J&J should have been hammered because of the tech bubble? Their fundamentals were fine. BUT, some of them were bid up artifically high (for no good reason), then took a fall back down to reality. What if this was your company in 1999, and you were relying on $1mm in retirement assets, when in fact the "true value" of those funds were more like $650K. And what if you retired early because of it, then BOOM! You're 57 and you just left a stable $125K a year job to retire early and peacefully but just lost 35% of your retirement. And OH, you are no longer accruing pension credits either. Time for that consulting gig.... THEN, the big question is, do you wait it out and see if this is a "temporary" drop in the stock, or is this real? Do you NOW diversify? But WHAT IF the stock goes back up in 6 months? I have this conversation all the time, and I can't stand it. I am always fearful that my recommendation will be wrong in the client's eyes (usually it's because the stock continues to do well). When in doubt, use financial planning fundamentals in your recommendations. At least then you can't be accused of making stupid recommendations (nobody can successfully sue you for diversifying out of a too concentrated position). But I don't want to be responsible for concentrated stock positions. I have them sign the concentrated position letter.I agree that you should diversify it unless you (and client) can live with the worst case scenario. Is he a candidate to take advantage on NUA? Without researching, I don’t recall any age or triggering restrictions. If so, it could make it easier to swallow.
Another technique I use in this case is simply to suggest a long-term plan to pull some of “the profit” off annually and diversify it. So we set up a plan to sell 5% or 10% of the holding annually, until the position slowly gets down to a smaller piece of their portfolio. Once people commit to this plan, then you don’t have to go through this argument each year, it’s simply January, so we’re going to sell x amount this year. Some people are so emotionally invested in the stock it’s difficult. This way, by just shaving off what they see as the “profit” you can get them started on a better path.
That's a good strategy. I have ended up usign that with some of my clients that will not part with a large chunk of their stock. Here's one success story.... client has $450K in company stock the we NUA'd back in 1998 (I think). It grew from about 200K. But he insisted on not selling any, and making withdrawals from his 401K instead (for income). Well, he wouldn't move his 401K to me, and it was invested 100% in the fixed bucket, withdrawing 11% per year (yup). So after much wrangling, I convinced him to move his 401K to me and invest it appropriately, start taking withdrawals from his stock (paying cap gains rates instead of ordinary income), and get much better diversisfication.Another technique I use in this case is simply to suggest a long-term plan to pull some of “the profit” off annually and diversify it. So we set up a plan to sell 5% or 10% of the holding annually, until the position slowly gets down to a smaller piece of their portfolio. Once people commit to this plan, then you don’t have to go through this argument each year, it’s simply January, so we’re going to sell x amount this year. Some people are so emotionally invested in the stock it’s difficult. This way, by just shaving off what they see as the “profit” you can get them started on a better path.
DIVERSIFY. Go back a few ago when a number well respected Technology Companies were then considered a very safe place to invest in the Technology boom. Share prices continued to climb , employees were investing in their company , money was being made and their futures seemed to be safe. Then something happened. Many of these people lost jobs , share prices dropped and have never returned to those heady prices again.
The members suggestions are excellent ways to help the client to diversify and protect their assets.Thanks everyone…I was considering telling him to put his other $1.1 mil in his company stock as well, that way we’d only have to review one position…you know, cut back on time…
Kidding.i find this to be one of the most difficult “discussions” to have with people, because it will NEVER happen to their company. P&G is a big player in my market and anyone there over the age of 55 instructs anyone younger to put 100% into company stock, as it made them all virtual millionaires in their working years.
i tried unsuccessfully to diversify another client 18 months ago OUT of C, did not take my advice. it always happens to the "other guy."P&G is a poster story for diversification. It hasn’t been that many years ago that P&G was cut in half. I know it well as I watched a client, who inherited $2 million worth of P&G, refuse to diversify when it would have cost him virtually nothing in taxes, only to watch his $2 million become $1 million. Sure, it’s recovered since them, but there’s no reason to believe this can’t happen again, and at a most inopportune time.
theironhorse and indyone ......They both make the EXACT point. The Investor views this from an Emotional perspective , your task is to move away from emotions and to the logical perspective of investing.
I know clients are typically stupid when it comes to making good decisions, but how in the world to you lose $1 mil and not do something different. I have clients who are freaking out because their $200K account is worth $185K. Some of them are ready to pull the plug on the whole deal. I seriously think someone should create a compliance letter that is simply called an I'm Stupid letter. Not a large holding, or non solicited order letter, just I'm Stupid. You have to sign it anytime you make a decision to do something completely opposite of what your finanical advisor and common sense tells you is appropriate. Perhaps it would get the point across to some of these really dense people.P&G is a poster story for diversification. It hasn’t been that many years ago that P&G was cut in half. I know it well as I watched a client, who inherited $2 million worth of P&G, refuse to diversify when it would have cost him virtually nothing in taxes, only to watch his $2 million become $1 million. Sure, it’s recovered since them, but there’s no reason to believe this can’t happen again, and at a most inopportune time.
Hey Vanilla ICE,
That's how to ruin a perfectly good thread! Save it for the anti-Jones threads at least....Spiff , would be an excellent Letter to be provided to clients. Also , a section to be filled out that you can insert other clauses that fit the individual.
I like the “I’m STOOPID” form, but I have a feeling compliance won’t approve it…
The joy of changing firms/going independent is that you can scrub the "I'm STOOPID" clients from your book...what a refreshing feeling that has been.[quote=iceco1d][quote=B24]Hey Vanilla ICE,
That's how to ruin a perfectly good thread! Save it for the anti-Jones threads at least....[/quote] But. But. But...I'm not actually anti-Jones...I was just jokin around.... [/quote] I know. But didn't you like the Vanilla Ice reference? (I forgot how young you are. Vanilla Ice was an 80's/early 90's pop "Icon" (sort of) that got far too little credit (IMHO)). You were still kissin' mama goodnight long after ICE ICE Baby came out.