Still in her 40s, the client had $5 million of the stock—worth about $3 million after taxes—enough to pay for her two homes, her children's college, and support herself for perhaps another 50 years. so for two years, Young urged the executive to diversify. At the time, Sun had a triple-digit price-to-earnings ration, and was, in Young's opinion, "way overpriced." They finally agreed to a $120 per share limit in 2000.
When the stock hit $119 a share, the client called. Young was expecting elation from a client who was about to cash in. Instead, the client said she'd taken the limit off the stock. "We think it's going to go higher," the client said, referring to her colleagues at Sun. Shocked, Young strongly advised her client to put the limit back on, since she had all but reached her retirement goals. The client refused.
And indeed, the stock hit $126, but the client still did not sell. And she didn't sell when the stock subsequently fell to $120, or $100, or $80. By then, the tech wreck was in full swing, and the client finally sold at around $30 per share. "Five million dollars, poof, gone," recalls Young. "I can assure you she's still working 10 years later," Young says, lamenting the fate of the client she no longer works with. For Young, the painful part of the story is that the client knew how much she needed to retire, while many executives don't. "Financial planning for these executives is so critical," says Young, whose practice, with about $240 million in assets under management, still consists of a lot of tech executives. "You have to have an exit strategy. You have to understand when you have enough, and [then you have to] sell."
One of the top issues advisors to corporate executive clients grapple with is persuading their clients to diversify their portfolios. Many hold far too much of their own company's stock. And now, a year after the more recent crash, many executives still have this problem. They cannot bear to sell stock they are certain will go up. Advisors who work with these clients say the mindset all too often is one of overconfidence: "I know more about my company than everyone else." So despite being sophisticated investors, they feel they can get away with the over-concentration without the consequences. But experts say the rules of diversification have not been repealed for corporate executives. How to deal with this thorny issue?
First, there are psychological issues to overcome. Many executives feel they are being disloyal to their company if they sell their shares, especially since the company's stock often has done well for them in the past. "[They feel] this is an important part of being on the team, and they're abandoning the team, and so resist the temptation to diversify," says Vince Clanton, a financial planner at The Chancellor Group in Atlanta.
Also, many of these clients watch their stock movements every day, giving them the feeling that they know it better than other people. "They feel what they're holding is the best thing to be holding," says Aegis Frumento, managing director in charge of the Executive Financial Services group at Morgan Stanley Smith Barney. His group is responsible for all transactions involving the restricted or controlled stock positions of clients who are corporate executives. "We can show them studies that demonstrate that executives are no better than the rest of us in predicting the future, and that holding company stock can be the worst thing for them. But there are still strong psychological inhibitions. Getting them to make the decision to diversify is the big step."
But a thaw in attitude appears to be beginning. Frumento notes that advisors he works with are starting to see a slow emergence from a mourning period, with executive clients accepting a new reality. "Clients are saying, 'This is the world, this is the way it is. I can't sit here in a corner forever. I have to make decisions again,'" he said.
But even now it does not always parlay into good sell decisions. Some executives have seen their portfolios take such a hit in the past 18 months that they feel they can't sell their company stock until prices come back up. "What you have is a deer-in-the-headlights approach," Frumento says. "They're saying, 'I believe you now, I should have sold last year, but I can't sell now, the losses would be so devastating.'"