Should Clients Sell Stocks to Fund Their Dreams?
Advisor Paul Pradel tells ThinkAdvisor how he counsels his wealthy clients who are rethinking their financial priorities — and their biggest stock holdings.
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?
If someone has 60% of their assets in a company, we don’t sell that to 5% overnight. I say, “Let’s slowly chip away at this.”
Why does that way work?
If a client sells to decrease exposure and risk away from that one holding they have, many times I’ll divert what they give me to invest. If, for example, I’ve peeled off a piece of Microsoft or Amazon, I’ll invest it in other companies that are also making money. So the proceeds go into something different from that concentrated stock.
Many are concerned that taxes will rise in the Joe Biden presidency. Have your clients voiced that anxiety, especially with regard to selling their stock?
Taxes tend to raise the hair on the back of people’s necks. Part of my role is to calm them a little. Taxation tends to be one of the biggest detractors from people taking action: “If I sell, I’ll have to pay taxes.” My role in talking to a client would be to say: “Do you want to sell right now because you’re worried? Let’s talk it through and not have a knee-jerk reaction.”
What if the client is definite about what they want to do?
I don’t let the tax tail wag the dog. I’ll honor them if they say, “I’m really worried but am willing to sell some stock. If taxes do go up, I’m not going to be mad.”
Please elaborate.
If, for example, I were talking to a client today with high concentrations of Amazon who says, “I’m worried about taxation, and I might want to sell,” I’m not going to tell them not to. But I may say, “If, next year the stock value increases by more than what the tax offset would be, wouldn’t you be better off?” So it’s challenging their thinking. I think that oftentimes selling [because of] taxation is an emotional sell.
What if they just don’t want to sell to decrease their exposure to a single stock?
I have to do a little [educating and encouraging] to get them to sell when [the company is doing] well because then, they don’t want to.
For instance?
When Microsoft was going through a tough period, I had a hard time getting clients to hold Microsoft stock. Now, because Microsoft is doing so well, I have a hard time getting them to sell it. It’s our job to try to educate clients about both [types of] periods [in a company’s life].
What’s another strategy you often use to reduce a client’s tax bill?
Gifting. The pandemic has caused many clients to be more charitably inclined, or at least more sensitive to [the notion of being] charitable. This might involve [availing themselves] of the [section of the] CARES Act that affords a higher level of cash gifts to charities in 2020 — and I hope that will continue.
How do you approach clients about benefiting from that?
I’ll say, “Let’s sell some stock, and then let’s ramp up what you give to the charities that you [usually donate] to and use charitable gifting to offset some of the taxation.
When I interviewed you in March of last year, Nordstrom stock was at $37; earlier it was at $80. Today it’s at $17. What have been the discussions with your clients most of whose stock is in Nordstrom?
Nordstrom clients aren’t mad at me right now because we didn’t guess at $60 that it was going to $70; nor did I tell them at $50 I thought it was going to $12. I simply educated them. We have a lot of retired Nordstrom clients, and I think most of them will say they’re happy [with outcomes].
Why does your chipping away strategy of selling work well with clients psychologically?
Most of them don’t want to go from a large concentration to a small one. Not only would the tax hit be huge, but they have a sense of familiarity and loyalty to the company that has driven so much of their personal wealth.
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