“You’re not going to run in, guns a-blazing, and say: “Hey, you’ve got $7 million — and $6 million is in Amazon! Let’s sell half of it!”
That’s Paul Pradel, owner of Pradel Financial Group, dramatizing the wrong approach to convince clients to diversify away from an extremely high concentration of a single stock.
In an interview with ThinkAdvisor, the certified financial planner describes the right way — a strategy that’s made him a 20-year expert working with executive and leader-level employees invested in large concentrations of mega-companies’ stock.
Based in Seattle and managing $180 million in assets for 110 clients, Pradel, 52, specializes in helping such employees at the giant firms headquartered right in his own backyard: Amazon, Microsoft, Nordstrom and Starbucks. Many clients have concentrations of employer stock and stock options so high that they can pose portfolio risk, he warns.
However, because these shares are housed in a host of different places — including 401(k) plans, IRAs and employee stock-purchase plans — often employees are unaware just how heavily they’re concentrated in a single position.
Pradel’s strategy has proven so effective that he’s even helped other planners who are supported by his BD, Commonwealth Financial Network, replicate his approach.
Formerly an FA with IDS/American Express Financial Advisors (now Ameriprise) for 10 years, Pradel left to open his own shop in 2002.
ThinkAdvisor recently held a phone interview with the New Jersey-born, suburban Detroit-bred independent, who talked about why proposing to sell a huge chunk of a single stock all at once goes over like a lead balloon but how his tack buoys clients and their portfolios.
Here are excerpts from our conversation:
THINKADVISOR: How do you encourage clients to reduce their high concentrations of employer stock?
PAUL PRADEL: You’re not going to run in, guns a-blazing, and say: “Hey, you’ve got $7 million — and $6 million is in Amazon! Let’s sell half of it!” The client will probably rotate out the door, and you won’t see them again.
So how do you handle the situation?
We put together a 30,000-foot view of the investable assets and calculate the percentage that’s in the stock of the company the client or prospect works for. If it’s like, 68% of a $7 million portfolio, that opens their eyes right off the bat. Most say, “Holy cow! I knew I had a lot, but I had no idea it was that much!”
How come they don’t know?
Often they have the stock in three or four different places: 401(k) plans, IRAs, investable brokerage accounts, stock options like ESPPs [employee stock purchase plans], RSUs [restricted share units], PSUs [performance share units]. What makes it even more complicated is that every year they get more stock because they buy or are gifted it.
What do you caution them about concerning that?
“You have a a snowball that represents [for example] 70% of your portfolio. If you do nothing, next year it will be 78% and the year after that, 85%. At what point do you want to address this?” That helps them see the light.
Clearly, your advice can help.
Over the years, Nordstrom, Starbucks and Microsoft have had periods of prolonged success and prolonged periods of challenges with the valuation of their stock. Nordstrom, for instance, is now in a period of great challenge. I can assure you that my clients who allowed me to help them unload their Nordstrom stock — which went from $80 to $37 — feel pretty good that we got them out of such a heavy concentration.