Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Portfolio > Portfolio Construction

Your Client Has Too Much in One Stock. What Do You Do?

Your article was successfully shared with the contacts you provided.

“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.

What’s the first step in cutting back?

It takes a while to educate clients about the pros and cons of high concentrations. We’re patient because if they’ve been with [an above-mentioned company] for a long time, they have a sense of loyalty and familiarity.

When you think that they’re ready, what happens?

We come up with a strategy — and it’s not to cut the concentration in half by going from Point A to Point B tomorrow. You can’t show them an asset allocation strategy and say, “Hey, let’s just sell this and buy this.” They have to feel that they have a well-thought-out strategy for diversifying away.

For example?

“What if we cut back 5% or 10% this year and at the end of the year, regroup and do it again — then do it again?”

How did you develop this specialty?

About 20 years ago, I was hired by Monica, a woman working at Nordstrom who came to me saying that she needed some help. I learned the Nordstrom benefits package inside and out. Within short order, my phone rang: “Monica told me to call you.” Then the benefits department called and asked me to do presentations. When the first client from Microsoft hired me, I took the same exact approach.

You of course provide clients with tax planning. What impact are President Trump’s tax cuts having?

People [in general] are saying they’re not getting as big a refund this year. But in many cases, it turned out that their payroll calculation was done differently and not as much was taken out per paycheck. They didn’t notice that. Now they’re all complaining.

Your philanthropic activity focuses largely on the Melodic Caring Project, of which you’re chair. A gala dinner and auction are scheduled for March 23 in Seattle. Please tell me about this organization.

We stream concerts to kids in hospitals .Some are battling cancer and other serious diseases. They watch the concerts on their tablets, and often the artists dedicate songs to [specific] patients by name. We have hospitals all over the country picking up the feed. We’re also doing concerts in the U.K. The healing power of music is uncanny.

What aspect of your practice brings you the most gratification?

I like the client relationships. When I went through a divorce two years ago, over two dozen clients called me to see how I was doing. A couple of them took me to dinner. One showed up at my office to check on how I was and refused to leave until we went out to lunch. It’s really neat to know what it means to be a trusted advisor.

Any early experience that prepared you for being an FA?

When I was a kid, I learned a lot about customer service by cutting lawns, shoveling snow and delivering newspapers. You learn how to treat people kindly; and you learn that some people are appreciative of extra effort and that some aren’t.

Do you have an account minimum?

My minimum is nice people who want to take their finances seriously, are willing to follow advice and want to grow. Of course, if they have those four things and also $2 million — awesome!

— More by Jane Wollman Rusoff:


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.