It Can Pay to Lose Your Concentration

Tab 1

April 25, 2017

Many successful executives possess wealth that is tied directly to their company’s stock. When the company thrives, these individuals’ wealth — and their accumulation of that stock — increases.


“Ideally, a portfolio will never have more than 10 percent of its assets in any one stock,” says Bryan Polley, Vice President of Wealth Management for The Private Client Reserve of U.S. Bank in Minneapolis. Yet for executives who receive company stock as incentives, bonuses and 401(k) contributions, it can be easy to lose that diversification. In some cases, Polley has seen investors with more than 90 percent of their net worth tied up in company stock.


If something goes wrong with the business or the marketplace, the value of that stock can quickly disappear, causing once-wealthy investors to lose a sizable portion of their holdings. Consider the lessons learned from the Enron collapse in 2001-02 or the crash of British Petroleum’s stock after the Deepwater Horizon oil rig disaster in 2010. “Those were unexpected events, and for investors with large concentrations of stock, their portfolios were decimated,” Polley says. A less extreme but equally impactful circumstance could involve expiration of executives’ stock options or the sale of the company, forcing them to sell all their stock at once and take an enormous tax hit.

The challenge for these investors is figuring out how to get out from under a burdensome stock concentration while minimizing that sudden tax burden. “Inevitably, investors have to pay taxes on stocks they sell,” Polley says, but they can spread the impact out over time and take advantage of potential money-saving choices to lessen the hit.



Investors should consider working with their financial advisor and CPA to create a road map for slowly diversifying their portfolio over time. While diversification does not guarantee returns or protect against losses, it can help reduce portfolio volatility and the risk of returns associated with an individual holding.

Tab 2

April 25, 2017

Research has shown that, over time, a single stock in an index is 68 percent more volatile than the index because, in an index, negative returns from one stock may be offset by positive stock events of other stocks in the index.*


How much stock investors sell — and how quickly — will depend on many factors, including long-term financial goals, time to retirement, current and anticipated tax issues, exposure to alternative minimum tax concerns and potential risks related to the stock value. “You don’t just want to sell the stock all at once,” Polley says. “You want to make a plan that will help you maximize your financial outcomes.”


For instance, investors could liquidate their stock over time through the use of covered call options, which can be an effective way to slowly reduce exposure and generate income. Another hedging strategy might be through the use of put options. Talk to your financial advisor for more information about these strategies.




Investors 10 to 15 years from retirement can stretch this diversification out over a longer period of time because they have the flexibility to recover if something goes wrong with the stock. But for investors close to the end of their career, Polley encourages a greater sense of urgency. “If the stock takes a hit, it can be catastrophic for someone who needs to retire on that income,” he says.


Diversifying with Charitable Giving: Triple Tax Benefit

Another strategy to consider is incorporating charitable giving goals into a diversification plan. While U.S. Bank does not provide tax advice, Polley suggests another choice can be transferring stock into a donor-advised fund for charitable giving rather than selling the stock and giving cash donations. “I hammer this one home with clients all the time,” he says. “It makes no sense for someone with highly appreciated stock holdings to give cash to charity, because they could give stock and avoid paying capital gains tax.”



Tab 3

April 25, 2017

Along with avoiding capital gains, this approach can offer investors up to a 100 percent tax deduction for appreciated securities held over 12 months, and the donor-advised fund can grow tax-free to support their charitable contributions over time. Investors can even leave the fund to their heirs to support future charitable giving, Polley says. “It’s a great tool if you have charitable intent for your wealth.”


Although charitable contributions are 100 percent deductible, there are limitations on what you can deduct against your Adjusted Gross Income (AGI) in a given year. If you’re donating appreciated securities to public charities, the annual deduction limit is 30 percent of AGI, and if you’re donating securities to private foundations, the annual limit is 20 percent of AGI. 

You can carry forward deductions exceeding these limits for up to five years, although you’re required to use as much of your present-year deductions as you can each year. Be sure to check with your tax consultant first for information that is specific to your particular situation.


Regardless of age, all investors should review their portfolio on an annual basis and work with their tax advisors and financial advisors to ensure they aren’t inadvertently building an unbalanced portfolio through stock accumulation, Polley says. He notes that even the most brilliant executives rarely have the time or inclination to stay up to date on tax laws and shifts in the market — nor should they have to. “People in these positions should have professionals they can go to for tax advice and financial advice, so they can focus on what’s important to them.


*Cambridge Associates LLC, “Concentrated Stock Portfolios,” September 2013.