Concentrated shareholding
A client can become wealthy on paper while remaining heavily exposed to the fortunes of one company.
That can happen through entrepreneurship, executive share awards, employer stock, inherited shares or a business sale involving retained equity.
The planning challenge is not simply whether the holding should be sold.
It is understanding how much concentration risk the client is carrying, what tax or legal constraints apply and how the position fits into their wider financial plan.
Josh Clancey works alongside tax advisers, corporate-finance professionals, lawyers and other specialists where a concentrated shareholding needs to be integrated into the client's broader wealth strategy.
A concentrated holding can dominate the client's financial outcome
A client may have:
- a large holding in their employer
- shares from a previous employer
- founder equity
- restricted stock
- listed shares received through a transaction
- inherited company stock
- a significant holding built over many years
The position may represent a large proportion of the client's investable wealth.
That creates exposure to:
- company-specific risk
- sector risk
- liquidity risk
- timing risk
- tax
- currency
- behavioural bias
The appropriate response depends on the client's objectives and the constraints around the holding.
Common planning areas with concentrated share positions
Employer stock
Executives can accumulate significant wealth in the same company that already provides their salary, bonus and career prospects.
Founder or business-owner shares
A business owner may retain substantial equity even after a partial sale or liquidity event.
Tax on disposal
Selling a concentrated holding can crystallise significant tax liabilities.
The relevant tax adviser should establish the consequences before implementation.
Currency exposure
An international client may hold shares denominated in a currency different from their future spending or liabilities.
Retirement dependency
The holding may be expected to fund retirement, making concentration risk more significant as the client approaches financial independence.
Estate planning
A substantial single-stock position can also form a major part of the client's future estate.
Questions to ask when reviewing a concentrated shareholding
What percentage of the client's wealth is in one company?
The significance of the risk depends on the client's total balance sheet, not just the value of the holding.
Why does the client still hold the shares?
The answer may be tax, loyalty, confidence, restrictions or simply inertia.
Are there dealing restrictions?
Executives and insiders may be subject to blackout periods, internal policies or other constraints.
What is the tax cost of selling?
The tax adviser should quantify the consequences before a diversification strategy is agreed.
Does the client need the capital soon?
Near-term spending, retirement or property objectives can make concentration more problematic.
Is the company also the client's employer?
Income and investment risk may be exposed to the same underlying business.
What level of concentration is the client comfortable retaining?
Diversification does not necessarily require eliminating the position entirely.
Useful resources for advisers working with concentrated share positions
Concentrated Share Positions for International Clients
A focused technical brief covering the planning issues that can arise where a large proportion of a client's wealth is held in one company.
Equity Compensation for Internationally Mobile Executives
A technical brief covering share-based remuneration for clients whose careers span several jurisdictions.
The Professional Adviser's Guide to International Executive Financial Planning
A broader guide covering executive compensation, pensions, investments, mobility and long-term wealth planning.
The Professional Adviser's Guide to Business Exit and Liquidity Planning
A useful companion guide where the holding results from a business sale or retained equity position.
Business Sale and Liquidity Event Checklist
A practical checklist where a concentrated holding forms part of a wider transaction or liquidity event.
International Executive Checklist
A practical resource for reviewing executive compensation, shares, pensions and wider financial-planning issues.
Diversification is a financial-planning decision, not just an investment decision
A concentrated position can exist for good reasons.
The client may:
- understand the company deeply
- have built significant wealth through the holding
- believe strongly in its prospects
- face substantial tax on sale
- be restricted from dealing
- want to retain a meaningful long-term position
The planning objective is therefore not automatically to sell everything.
It is to understand how much of the client's future depends on one outcome.
A diversification plan can consider:
- staged sales
- tax timing
- liquidity needs
- retirement objectives
- other investments
- cash reserves
- currency
- the client's willingness to retain risk
Concentration risk can become more important as financial independence approaches
A client with twenty years before retirement may have greater capacity to tolerate volatility than someone planning to stop work in two years.
The closer the client gets to relying on the portfolio, the more important it becomes to understand what would happen if the concentrated holding fell materially.
Cash-flow modelling can test scenarios such as:
- a significant fall in the share price
- delayed retirement
- reduced future share awards
- lower dividend income
- a change in employment
- a business sale at a lower valuation than expected
The purpose is not to predict the share price.
It is to understand whether the client's financial plan is overly dependent on it.
When should the referral happen?
A referral can be useful where the client:
holds a significant proportion of wealth in one company
has substantial employer stock
receives RSUs or share options
is approaching retirement
has recently sold a business but retained equity
is considering selling a large position
is concerned about tax on disposal
has a concentrated holding in another currency
needs a diversification plan
Have a client with a significant concentrated share position?
If the client's wealth is heavily exposed to one company, an initial discussion can help establish how much concentration is appropriate, what diversification options are available and how the position fits into the client's wider retirement, investment and estate plan.