How Much Tailoring Do You Need? Some Examples
There are many ways to think about tailoring.
Do you need your portfolio tailored around your cash flow needs? Do you need it tailored around your balance sheet? Certainly, you want it tailored around your risk temperament and time horizon. Do you need it tailored around a large concentrated wealth situation? The types and forms of tailoring are endless.
Concentrated wealth situations tend to be the most complex, so let’s review some examples and how we’d recommend you begin thinking about your circumstances, so you can get engaged in a thoughtful conversation with us about this important need.
We have helped many people with concentrated positions in stock options and other types of highly appreciated assets navigate around these special circumstances. Here are some examples:
- One of our clients paid 7 cents a share (fortunately, taking advantage of the 83b election) for stock options that later appreciated past $150 a share. We helped him before the exercise, during the exercise period and of course after fully exercising all the options. What a life-changing liquidity event!
- Another client was a C-suite executive (Chairman & CEO) with restricted stock and options making up a huge portion of his net worth with only small windows of time we were able to trade given insider trading restrictions. We helped him navigate before, at and after retirement with large, medium and finally small concentrations in the volatile company and industry.
- Another client was a female executive in biotech industry that hit it big and needed a game plan as she was quite risk adverse and had the desire to start a family foundation.
- Another client inherited a fortune, with extremely low tax basis stock in a public entity. She wanted to retain ownership, so we worked to contain volatility via a sophisticated forward contract arrangement and equity, real estate and fixed income diversification strategies built around her core holding.
“At any given time, we are navigating new and long-standing cases with such concentrations and have developed sound ways of helping clients think about and navigate the dangers, opportunities and threats of various strategies and tactics.”
Some useful ways to organize your balance sheet, to gain more perspective, is to sort out what you have into five basic categories:
- Net Liquid (cash less short-term debt)
- Net Semi-liquid (liquid stocks, bonds, mutual funds, ETFs less mid-term debts)
- Net Retirement (retirement accounts less loans on retirement accounts)
- Net Personal (residence(s) less mortgages and HELOCs)
- Net Non-liquid (business entities, stock options, concentrations, investment properties less loans and estimated taxes on such holdings)
What percentage does each of these categories represent? Where are you strong? Where are you weak? We have diagnostics and recommended ratios that can help you further assess such strengths and weaknesses.
Another useful way is to organize what you have, beyond personal property, by what we call the three Wealth Allocation Wheel categories:
- Safety Assets (cash, CDs, Treasury Bonds that retain their value even in extreme situations)
- Market Assets (stocks, bonds, mutual funds, ETFs regardless of whether in semi-liquid, retirement or trust accounts)
- Aspirational Assets (businesses, investment properties, stock options and other assets that are leveraged in some way (debt financing) or non-liquid or concentrated)
Now if you took your annual spending (for all standard of living expenses (non-discretionary, discretionary and extraordinary) grossed up for taxes (40% or so, depending on what state you live in) and annualized this figure, what multiple (of grossed-up annual spending) do you have in each category? Are your Safety Assets above 1x and below 5x? Are your Market Assets above 30x? Are your Aspirational Assets above 30x? We can help you sort out what these multiples and ratios mean and how to use them to make short- and long- term decisions.
It is only after examining your balance sheet and situation in the above ways that one can begin to determine the best strategy for honing down concentrations and determining how to invest the Market Assets bucket.
Simple is Better
Under a simple is better philosophy, we’d rather address issues at their root rather than attempt to overcompensate for them with complicated techniques on the periphery. Our advice to anyone facing these circumstances is to speak with unbiased professionals who are aware of and able to advise you on the full spread of options – not a single option proposed by a narrow specialist. We can be a part of your team!
There is plenty of value a narrow specialist can provide (and we want to tap that expertise), but only after broader perspectives and options are considered with a fiduciary wealth management firm. Call us if you’d like to begin looking into these matters, on a strictly confidential basis, more specifically.