Enron Debacle Has Advisors Revisiting Clients With Diversification Message

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With another crisis on the front page of every newspaper–this time in the form of Enron’s bankruptcy–financial advisors are seeing the situation as an opportunity to help their clients.

“Every crisis creates an opportunity,” says Gary Rathbun, president of Private Wealth Consultants, Ltd., Toledo, Ohio.

“Can we help the Enron people? Probably not; right now that’s out of our hands. But can we help the people at other big companies? I think there’s tremendous opportunity to get into conversations we’ve never been in before,” he says, “and I think that’s a good thing.”

The opportunity to which Rathbun refers is consumer education. With the recent events at Enron and the continued volatility of the financial markets, there are thousands of Americans who are taking another look at the holdings in their 401(k) plans. Many of the Enron horror stories involve employees who had a majority of their retirement assets allocated to company stock.

Retirement experts note that while holding employer stock is not a bad thing, it’s important for people to diversify. “We tell people in our seminars that you shouldn’t have any more than 10% of your total portfolio invested in the company you work for,” says Jim Cook, president of National Financial Services Group, Atlanta, Ga.

Employees of public companies may have a hard time disciplining themselves to limit their investments in company stock, says Rathbun. “Part of the problem with owning company stock is that you take a rose-colored glass view of your own company,” he says.

Roger Bozarth, president of The Insurance Advantage, Orlando, Fla., agrees. “I think when you look in the paper and you’ve got a stock that’s doubled, tripled, or even quadrupled in 4 or 5 years, and you’re sitting there working with a lot of activity going on, you’re in the midst of what you think is a company that’s doing particularly well. That gives you a comfort level.”

Bozarth says people shouldn’t assume that since a company has done well in the past it will continue to do well.

“I think with the Enron events, it’s going to be easier to discuss diversification and future planning than it has been in the past,” adds Rathbun.

Raising consumer awareness and educating clients are ways agents can bring additional value to their relationships with clients.

“The reputable advisor will be able to create some value here,” continues Rathbun. “That’s the opportunity.”

“We’re taking more of a proactive approach,” says Cook, who sees this as a reason to visit with his current clients.

In the past, some of Cook’s clients felt differently about diversifying away from their company stock. Given recent events, however, they are now much more receptive to the idea.

“We’re actively going to our clients and telling them to revisit where their 401(k) plans are, and reestablish the fact that you really shouldn’t have more than 10% of your account in your company’s stock,” says Cook.

Often, he continues, companies will provide a matching contribution to a 401(k) plan in the form of company stock.

Cook explains that some plans will allow for an in-service distribution, giving employees the opportunity to liquidate company stock and move it into a self-directed IRA while still working for the company–without terminating from the plan.

Higher level employees may have even more exposure to the performance of their company’s stock, explains Cook. In addition to the 401(k) match of stock, these individuals may have incentive stock options. Cook notes that those options can’t be diversified.

“If the options hit the strike price, high level employees are going to have a substantial amount of company stock,” says Cook.

“We’re recommending to those people that they don’t have any [company stock] in their 401(k),” he says.

“You’ve got to be careful,” he concludes.


Reproduced from National Underwriter Life & Health/Financial Services Edition, February 18, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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