Advisor Paul Pradel encourages clients who own high concentrations of their companies’ stock to diversify risk by selling bit by bit over time. But for some, the coronavirus pandemic has caused a change of heart: They now want to sell a big chunk and use the proceeds to radically change their lives.
How does the principal of Pradel Financial Group guide them to the best outcome? By discussing options and often by “challenging their thinking,” as he tells ThinkAdvisor in an interview.
Seattle-based Pradel specializes in working with leaders and other executives of Seattle-based giants Amazon, Microsoft, Nordstrom and Starbucks.
His strategy of unwinding risk by “chipping away” at a single stock has worked well for more than 20 years. Part of his method is discouraging clients from making a sell decision by, as it were, letting “the tax tail wag the dog.” Indeed, right now they’re worried over the prospect of tax hikes proposed by President-elect Joe Biden.
But reevaluating their lives amid the pandemic, some clients are keen on selling stock to buy a home in a quiet spot and leave the bustling city behind. The tax such sales would trigger is far from a minor issue, however.
In the interview, Pradel discusses how gifting can significantly help offset such taxation thanks to a section of the CARES Act that permits a higher level of cash gifts to charities in 2020.
Pradel, whose broker-dealer is Commonwealth Financial Network, advises 115 clients worth between $2 million and $15 million, and he manages 401(k) plans as well.
ThinkAdvisor recently interviewed the CFP, who was speaking by phone from Seattle. Formerly an advisor with a large firm for a decade, he launched his independent practice in 2002. In the grip of the pandemic, “People are going, ‘Wait a minute — what’s that money [in stock] for?’” Pradel says. “They’re reevaluating what’s important to them.”
Here are highlights of our conversation:
THINKADVISOR: What are your clients with large concentrations of their companies’ stock asking you amid the pandemic?
PAUL PRADEL: In the past, I saw more people holding onto their stock for a traditional retirement goal. Now they’re more focused on, maybe, doing something different with that money because they’re reevaluating what’s important to them.
How does that manifest?
They’re accustomed to working [remotely] from home now; so they’re going, “Do I really want to live in a city? Do I really want to stay in the rat race? Do I really need $15 million to live? Maybe I want to move to Bozeman, Montana, and quiet down my life.” So they’re thinking, what’s that money for?
But don’t you have a specific strategy with clients to reduce the risk of having too much invested in one stock?
Yes. It’s an ongoing strategy that deliberately chips away at the stock [by selling it] over time. I’m still having the same conversations with clients that I had before the pandemic: “How much do you have in [company stock]? Do you understand the risk? How comfortable are you unwinding that risk?”
But there’s an added perspective now, right?
The pandemic has caused some people to say, “Let’s look at that strategy and maybe accelerate it.” They may say, “I need $1 million to buy a house.” In fact, I just spoke to a client who bought a home in the San Juan Islands. That was a goal originally slated for post-retirement. So it’s a matter of where the money goes. I’m seeing more and more clients say, “I didn’t want to sell before because I had a target of the stock getting to a certain value.”
But they want to spend it while they’re still relatively young. Is that part of it?
Yes. They’re saying, “Maybe I don’t want to wait till I’m retired to buy that second house.” So some clients have decreased exposure that way.
What has been more typical of how you guide them in decreasing exposure?
The majority of times that we chip away, we’re moving the money into other stocks, part of their well-diversified portfolio.
And you do that slowly?