Head of Wealth Advisory, Capital Group
Private Client Services
Advisors are aware of the potential risks clients might face when large portions of portfolios are concentrated in a few stocks. Some advisors, though, might be less certain of possible ways to diversify this risk when appropriate for clients. Michelle Black, wealth advisory senior manager at Capital Group Private Client Services, offers an insightful way for advisors to approach this question with clients and to form a strategy that fits clients’ objectives.
Michelle Black: Concentrated stock is often how many executives built their wealth, and our job as advisors is to help these clients maintain and grow that wealth. But, just because somebody has a concentrated position in a single stock, it doesn’t mean that they have to diversify. A lot of other factors need to be considered, and clients appreciate it when we take them through what those factors are to understand how much really needs to be sold.
Now, when diversification does make sense, the right strategy depends on the client’s objectives. Instead of an outright sale, private foundations and donor-advised funds are great for investors who are charitably inclined. Grantor Retained Annuity Trusts are great for investors who want to transfer wealth, and Charitable Remainder Trusts are useful for those who want to generate income and defer the capital gains tax.
But, what about clients who don’t have wealth transfer or philanthropic goals? Well, clients could hedge those positions using protective puts and collars. They can generate additional profit by writing covered calls. They can monetize their position through the use of prepaid variable forwards, or they could use exchange funds to diversify without selling. But, each of these techniques comes with their own set of benefits and risks. You add value as an advisor by helping to explain these to the client so they can clearly understand the trade-offs before implementing any one of these strategies, and feel that they have made a well-informed decision about their concentrated stock holding.
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Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.