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A Thoughtful Approach to Risk in Concentrated Positions


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by  Keith McKenzie

All financial portfolios include a certain amount of risk. But for corporate executives with concentrated stock positions, risk is a factor that shouldn’t be taken lightly. It’s not the risk itself that’s the danger, it’s the mismatch between how much risk you have and how much risk you should have. Eliminating the mismatch between your actual risk and your optimal risk is the best way to ensure you’re getting the most out of your concentrated position.

Risk can be a good thing or a bad thing. It all depends on your unique situation. If you’re a single 25-year-old with no mortgage, $5M in the bank, and $1M worth of stock options, you can take all the risk you want. If, on the other hand, you’re a corporate executive with $200K in the bank and $8M worth of concentrated stock options, you had better understand and manage the risks to which those options are exposed. The issue is no longer your personal risk tolerance, but rather that of your family and your financial future.

Whatever your situation, it’s always the risks you’re unaware of that are the most dangerous. When it comes to risk, a lack of awareness and, more importantly, a lack of understanding are shortcomings that, time and again, undo even the savviest investors. For executives with concentrated positions, these shortcomings are often accompanied by some easy-to-spot behavioral patterns—each of which is a risk in itself.

Overconfidence in One’s Company

One common mistake corporate executives make is to underestimate the volatility of their company’s stock. After all, they can see from the inside out that their company is strong. It isn’t that such executives necessarily work for sub-par companies and are oblivious to reality. Rather, they don’t understand—or don’t appreciate—that the same risks exist for every publicly traded company, even their own. The mismatch arises when an executive is so excited about his company’s prospects that he fails to recognize a simple truth: there’s no reason his company isn’t just like any other company that one day was sitting on top of the world and the next, because of factors outside of its control, saw its stock plummet in unimaginable fashion.

Overconfidence in One’s Self

Another common misstep made by executives with concentrated positions is good old fashioned hubris. Most individuals in this scenario got there for a reason: they’re smart. They’re used to being the smartest person in the room, in fact. Many such executives believe the financial services bar is set so low that they’re probably much smarter than the average broker or advisor. They’re confident in going it alone and managing their own portfolio. The problem is that as the amount of your holdings rise, so do their complexities. The management of a concentrated position requires an expert team with sophisticated insight. Even the most intelligent individual simply doesn’t have the experience and tools necessary to manage and mitigate the nuanced risks inherent in a concentrated position. Too often overconfidence prevents executives from getting the help they need early enough in the financial planning process.

Execution Risk

One final behavioral risk that executives with concentrated positions are wise to avoid is execution risk. Sometimes it takes the form of acting on suboptimal advice or simply working with an advisory team that they have outgrown with the scale of their new wealth. Other times it’s blindly exercising options without identifying and executing an optimal disposition strategy. It might be executing those options in the wrong order, or executing the wrong type of option without consulting a tax advisor first, constructing an inefficient 10b5-1 plan, or simply paying too much for the trades. With the dollar amounts represented by many corporate stock option plans and concentrated positions, poor execution can have dire consequences. Yet still it’s a risk that few executives take the time to fully understand vis-à-vis its potential impact on their financial well being.

The Right Approach to Risk

The risks outlined above are just a few of the many facing executives with concentrated stock positions. It’s important to speak with an expert advisor to identify the risks you might not be aware of, and develop a strategy for managing and mitigating those risks. Identifying how much and which type of risk you should keep in your portfolio should be a collaborative effort with your wealth management team. Each individual’s situation is unique; there isn’t a textbook answer or online simulation that can do this personalized work for you. It’s a thoughtful, in-depth discussion about balancing all of the risk factors facing you and your family.

Only by working with a trusted advisor with relevant expertise can you identify the risks to which your position is exposed. And only then can you strategize and optimize those risks so that you can use them to your advantage. Risk is valuable—it’s the way to boost earnings. But making sure you have the right level of risk is the most important factor in getting the most out of your concentrated stock position. The right level of risk is often the very thing standing in the way of you achieving the goals you have for yourself, your family, and your future.



Speak with an advisor

There’s no better time than now to protect the wealth you’ve built. Contact us today to speak with an advisor.