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The Dumbest Mistake Your Clients Make

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Okay, so the economy and the stock market are seemingly flying high again. Since October alone, our U.S. stock market has risen 22%; and the Dow Jones is flirting around 13,000. This is the highest the market has been since May 2008.

So, guess what? Your clients are going to get greedy again. People soon forget about past bad investments (Bear Stearns, General Motors, Washington Mutual and … I miss the talking sock puppet), and fear and greed dictate most investment decisions. For many years, their 401(k)s have effectively been 201(k)s, but now they are “back to even” and ready to turbo-charge their retirement plans. And while there are plenty of stupid investment bets they will make, the worst mistake is the easiest one of all to make.

Here it is: Putting money from their 401(k)s or other company sponsored retirement plan into the stock of their company. You’d think after Enron and Fannie Mae, our clients would learn from horrendous past examples – but no. Only four out of ten 401(k) plans offer the company’s stock as an investment option, but among plans that do, on average, one-third of an employee’s equity investments are in company stock.

A phony discount

Why do employees retrace poor investment steps?  Partly because the company bigwigs have loads of company stock, and workers figure, “If it’s good enough for the CEO, it must be good for me.” Partly, too, because “owning” a piece of the franchise that employs you is (hypothetically) a great motivator for the worker bee. This type of rationalization can be financially terminal, however. How the wealthy officers of a company invest their money has no relationship to average Joe Employee. Moreover, putting more assets into the company breaks investing rule No. 1: diversification.

According to Vickers Stock Research (which follows executive company stock trades), over time, the amount of stock sold by U.S. executives outweighs the amount bought by more than two to one. Do you think they know something? Relying on the company to pay your salary — as well as provide your benefits, such as health insurance — is enough exposure in one asset for almost anyone.

Yet another motivator for employees is that they get to buy their company’s stock at a discount – which begs the question: a discount to what?  Ask former employees of WorldCom, Lehman Brothers and even companies that haven’t gone bankrupt but have lost billions in share price declines (think: Bank of America), if they would buy company stock at any price, discounted or not. I can tell you what their answer will be. 

Mitigating risk

Owning equities in a long-term portfolio is a great idea; however, in the short-term, the risks must be mitigated — not extrapolated by doubling down on the company. This is where you, as an advisor, can make the difference for your clients.  Open your clients’ eyes to how much exposure they already have with their employer. Advise them to invest all they can up to any amount the company might match in their 401(k) plan, but steer them to other less risky investments or strategies for the non-matched amounts. 

You can also add value by sharing your knowledge about safe products with lifetime income and assisted care riders. Clients who understand the poser of equity ownership long-term would likely love learning about variable annuities, as well as the similar protection offered by fixed or indexed annuities.  Start a conversation, plant the seed of knowledge and then wait for your client and referral garden to bloom.


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