Entrepreneurs with most of their wealth tied up in their businesses are probably close to the top of most financial advisors’ prospect target list.
Advisors know the lack of diversification puts their capital at risk and want to help manage their wealth. But how do they make the case?
It may help to understand the mentality of a business owner and to make clear distinctions between entrepreneurial thinking and long-term portfolio investing.
And that is a task that Francois Sicart, the founder and chairman of Tocqueville Asset Management, has helpfully undertaken in an open letter he wrote to a friend, a senior executive for 10 years at one of the most successful public companies in the Internet sphere.
The tech exec had a sudden epiphany and asked: “I suddenly realized that almost 90% of my personal fortune is in the shares of my company. Is this safe?”
Sicart frames the question as a “patrimonial” rather than “investing” question.
He concedes that the entrepreneur’s company shares likely have better prospects and more favorable valuations than other investments, but advises the entrepreneur to consider this a “life choice” rather than a mere stock market decision:
“Even if at some point in the future you decided to go into another venture, you would be at an age when one does not invest all of one’s capital in a single project. You will need a more diversified nest egg as a backstop – for your security and your family’s,” Sicart writes.