Managing a large single-stock portfolio

Managing a large single-stock portfolio

Managing a large single-stock portfolio 150 150 Clint McNally

I work with a lot of executives and their companies expect them to have ‘skin in the game’ – and skin in the game means shares in the company. So over time, they end up with a large single-stock portfolio. This ensures they’re aligned with the objectives of the company and makes sense during their career with that business. But I often need to work with these clients to manage the considerable risk attached to having all your eggs – including your super – in one basket.

Suddenly they’ve got a very significant percentage of their net worth tied up in the company that they work for, which can mean a comfortable retirement if it all works out well. But if it doesn’t and you haven’t spread the risk to protect your future – then your future is totally aligned to the fortunes of one company.

For clients that have a large single-stock portfolio, there are several considerations that I need to bring to their financial planning to make sure it works.

When talking to executives, I ask what their plans are for their careers, what they want to do in the future and how they can actually create diversity when they’re managing and negotiating their stock holdings. We look at time frames and succession plans. I look at their long-term goals and those of the company and see how they align. I also examine what flexibility they’ve got to structure their stock to minimise tax.

Most importantly, they need to make sure that they diversify what they’re doing outside of the company. The first thing I do is discuss the risk and try to implement or introduce an investment strategy that allows them to diversify because the risk of loss is real.

Understand that there will be tax to pay. When you receive those shares as a bonus there will be tax and you need to have the liquidity available to pay that or the flexibility to sell some of the shares when you choose.

If you run your own business, you’re the key person. You need to have a strategy in place because your family’s financial future is linked to your ability to continue to work. The conversation then is how are you preparing your family? If you’re the owner, how are you preparing an heir within that company to take over the reins once you leave? If something does happen to you, what are you doing to make sure you’re de-risking the business.

The worst outcomes for clients have been those where they’ve been heavily invested in one company without any diversification. If the company is a single strategy company – for example, a mining company that only deals with one metal the risk is even greater. If that strategy works, fantastic, but if it doesn’t, the whole company is significantly affected and their wealth alongside that.

For anyone with a large single-stock portfolio, it’s important that they manage their risks and have a plan in place so that their entire wealth is not impacted by one company.

Clint McNally is an Executive Advisor at Viridian Advisory

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