5 Key Questions for Owners of Concentrated Stock Positions

A&I Wealth Management > Periscope Newsletter > 5 Key Questions for Owners of Concentrated Stock Positions
Perhaps you know of someone who has a lot of money tied up in one company’s stock. Perhaps their company had an ESOP (Employee Stock Ownership Plan) or perhaps they have options, or warrants or other compensation linked to their company stock. A common reward, it could also be risky for a personal financial plan.

Start with the fundamentals when you think about how to diversify out of a concentrated stock position. From here, the strategy that you use will become more clear.

How did you get it?

The story behind how you accumulated this stock position is as important as the money itself. You have paid an emotional price to accumulate this money – sacrifices you’ve made, great decisions you’ve made, memories that flood you with emotions, helpful and not. Tell the story, or write it down. Make sure that you start with how, and why, and ask questions about the meaning of the money you’ve got on the statements, tied to a company. Spending time here is often overlooked and completely unique to you, but it’s worth the effort. and nbsp;

How much is it?

After you’ve worked through the history of how you got here, sum up the numbers. Many times, company plans tie up a lot of money and when you leave employment, you’re leaving money behind. Ask the logical questions in this stage – the ones that can be answered with a calculator. Do the tax calculations. With the help of your financial planner and/or accountant, you’ll be able to realize the financial impact of the money, and it might be greater or lesser than you think. Don’t be wary of the emotions this may cause. They are normal, and you may need to return to the first stage for a time.

How much is too much?

The third step is to put the story and the money in context. How much of your net worth is tied up in one company? For many business owners, it is over 50%. What would it mean for the company to go to zero? Likely, the first reaction is emotional and that is why I recommend you start with the story and the meaning of the money. The answer to the question “how much is too much” is unique to each owner. and nbsp;From a financial planning perspective, concentrated stock positions often mean concentrated risk, so one answer may involve greater diversification.

What is the ideal situation?

Similarly, the ideal situation is unique to each person. It usually revolves around “keeping my family safe” even if the business goes belly up, or even if I die, or even if something awful happens. But don’t start here, with the vision of the future. Instead, start with the past, then the logic, and then ask the “ideal” question. You’ll find that you can make more progress if you’ve honored the history before you dream of a future – or several possible futures – and begin to separate yourself from your stock.

How long will it take?

Sometimes, it takes a long time to move money out. Sometimes, you get a liquidity event. Either way, the plan is the most important part of the transition away from a concentrated stock position. Write it down, with the help of your financial planner, and then make adjustments. Amazing resources, many of which are available on the Internet, will quickly inundate you with complicated choices. Start the searching with the advice of your financial planner and you’ll be best suited for success.

What can you do next?

So, you’ve got the history, the feelings, the math and the vision (with the beginnings of a plan), now you need to ask yourself a very simple question: What is the very next step I can take? Then take that small step towards handling your concentrated stock position. It’s always a question about the meaning of the money, and never the money in isolation, that brings about the best chances of success.

About the author

Karl Frank, Certified Financial Planner ®, MSF, MBA, MA, is the President of A&I Financial Services LLC, a local business that specializes in wealth management, insurance planning, and retirement planning. Karl cares for business owners and the businesses that care for them. Learn More about Karl.