5 ways to attract HNW clients holding concentrated stock

Financial professionals looking to boost their ranks of high-net-worth clients should consider focusing on solving a specific, but common, problem many of them have: concentrated stock positions.

They might be a young tech employee whose startup went public, a longtime executive of a major corporation, or the third-generation heir of legacy shares in a family business or other company stock.

Most investment advisors already understand how to use investment strategies to reduce risk in portfolios with concentrated positions. But savvy financial professionals should also consider how they can help these investors with their planning needs and, in doing so, develop a client niche that could help boost your practice’s growth.

“These are great ways for financial professionals to offer support and show knowledge outside of investment advice that can also provide immediate value,” says Leslie Geller, wealth strategist at Capital Group. “For the advisor, helping prospects with these issues accomplishes a ton of things at once without a lot of effort.”

Here are five ways to start a client relationship with investors holding concentrated stock positions:

1. Connect them to COIs

For some investors, concentrated stock represents new wealth, and they may have little to no experience working with financial professionals. This is where you can put your centers of influence (COI) network to work.

Ask the prospect: Do they have an accountant or estate attorney? If they’re a young tech employee with overnight wealth, they may not. If they do, mention to them that their changed financial picture might warrant a change to working with experts who have more relevant experience working with investors in their position.

Remember, though, that this process is akin to matchmaking. The estate planner you set up with a 35-year-old woman with young kids may be different from the one you’ll connect with a couple in their 60s. So, make sure your COI network is robust enough so you can tailor your recommendations to best meet that prospect’s needs. You want the investor to build a successful relationship with this expert, which, in turn, helps you forge a deeper connection to the prospect (and build your own network).

2. Create or update an estate plan

Another way to show value quickly is through estate planning guidance. Whether the concentrated stock wealth is new or has been part of the family for generations, basic estate planning can often be put off for “later.”

If the prospect mentions young children, concerns about aging parents, or the family’s charitable goals, those are all good cues to follow up and ask about their estate planning.

• Do they have a will and a revocable living trust, if relevant? Is it updated?
  
• Make sure beneficiaries and fiduciaries are up to date and in line with current wishes
  
• Designate a durable power of attorney and prepare a living will (also known as an advance healthcare directive)

Financial professionals can also add value by confirming that the prospect has consulted with a legal advisor to review the will, revocable living trust, durable power of attorney and living will to confirm they are valid.

3. Offer tax strategies to consider

Concentrated stocks can be a way to build wealth, but their accumulation can make determining an investor’s tax liability a complex process. You can help clarify what options the client or prospective client has to both maximize value while mitigating taxes owed.

Consider the longtime employee of a major airplane manufacturer. In addition to a paycheck, she could also be getting restricted stock, incentive stock options or other securities to enhance her compensation package. You can highlight some tactics for the employee to discuss with their tax professional to take full advantage of this type of compensation.

Filing an 83(b) election. This allows the holder of restricted stock to pay taxes on the value of that stock at the time it’s granted, not at the value in the future when it’s anticipated to be worth more (and come with a higher tax bill.)

Waiting to exercise options. By holding incentive stock options for at least a year after exercising them, the options can be taxed as capital gains rather than regular income, which typically is at a higher rate. (That said, determining when to exercise and sell ISOs can trigger the need to pay an alternative minimum tax. The CPA you introduce to the prospect can provide a more detailed explanation of her options.)

A prospect or client might be looking for advice on selling some or all of their stock. Helping them come up with a strategy for doing so is an intensive effort itself, but you can walk them through some initial considerations on tax strategies from the proceeds of any sale.

Tax-favored investments. Vehicles like insurance and 529 accounts can be a good way to defer taxes, while also providing a nest egg for children and other family members. 

Out of state trusts. Investors in high-tax states could consider creating a trust domiciled in states that don’t have state income taxes. The ability to delay and even avoid taxes on this money can allow for additional growth over the years without the IRS taking a cut.

4. Wealth transfer to the next generation

Wealth transfer topics are a good conversation starter for clients and prospects of any age. Stock values are at record levels and making gifts could reduce their exposure to gift and estate taxes. This is especially important given the currently historically high lifetime exemption amount is set to expire in 2025.

There are a number of gifting strategies that allow the donor to direct wealth to spouses and children and reduce taxes, while also retaining some control and access. This technique could be popular among investors who are younger and have many years to enjoy their wealth. These include:

Spousal lifetime access trusts (SLATs). The investor can give away up to $12.92 million, the current lifetime exemption, while retaining indirect access to the funds (through discretionary beneficial interest.) Because the SLAT is funded with a gift made during the spouse’s lifetime, any post-gift appreciation is within the trust and so excluded from the estate of both spouses for tax purposes.

Family holding companies. Family members can become members of an LLC or partners in a limited partnership,  who benefit from assets held by the holding company, while the investor maintains management control. Family holding companies can also enable the transfer of shares to heirs at a discount.

Domestic asset protection trusts (DAPTs). An investor can set up this trust for herself and make herself a discretionary beneficiary.

You might also consider bringing up gifting strategies that have specific advantages in the current low interest-rate environment.

Grantor retained annuity trusts (GRATs). These trusts enable an investor to transfer any future appreciation with minimal use of the gift and estate tax exemption. (They are especially useful if the investor has no exemption remaining.) The annual rate of return that the IRS assumes an investor will be able to get on her assets (“hurdle rate”) is historically low. Any growth of assets in a GRAT beyond that low rate can be passed on to beneficiaries free of estate tax.

Charitable lead trusts (CLTs). Similar to GRATs, CLTS include the ability to make a charitable contribution in addition to receiving the subsequent transfer tax benefit of transferring future appreciation above a certain hurdle rate.

5. Make a plan for charitable giving

Apart from moving assets to family members, advisors could help walk prospects through strategies to support charitable organizations focused on causes they care about, while also reducing their tax bill. Some of these options include:

Donor advised funds (DAFs). These investment vehicles are less expensive and easier to administer than private foundations. The investor can take an immediate tax deduction for the full amount of the donation and retain advisory privileges over how the account is invested and how the money is distributed to charities over time.

Charitable remainder trusts (CRTs). Giving to a CRT can be a good strategy for diversifying out of concentrated equity while funding a cause important to the investor while also receiving a tax break. 

Each of these five themes illustrate an opportunity to start a conversation and quickly demonstrate your value to a prospect or client with concentrate stock positions – and ultimately form a long-lasting client relationship.

“You as the financial professional do not need to know all the details of these vehicles or strategies,” Geller said. “You are identifying issues and possible solutions, and then connecting the prospect to the experts who can help guide them. But you still get the benefit from the fact that the investor now looks to you as their ally – and, ideally, as their new advisor.”