Financially Comfortable? The Hidden Risks You Can’t Afford to Ignore
Think you're financially secure? If you've got a solid portfolio, a vacation home, or even just a nice cushion saved up, this episode is for you. Bob and Brian uncover the overlooked threats that can sink your financial ship—from lacking umbrella insurance and cybersecurity exposure to the dangers of a sloppy estate plan.
They also tackle the pitfalls of over-concentration in company stock and the myth of diversification. Plus, how to fireproof your finances from family drama. If you’ve built wealth, now’s the time to protect it.
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Bob: Tonight, the hidden risks that those with a nice nest egg often overlook. You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James.
Tonight, we're shining a light on something that doesn't get nearly enough attention, and that's the hidden risks financially comfortable families often overlook. When we say financially comfortable, we're talking about everyday folks, not the high rollers and multi-millionaires like Brian, who fly around on private jets.
Brian: Yeah. I meant to tell you, Bob, I scratched your car in the parking lot this morning with my private jet. My bad. Came in a little too hot. Yeah, so who are we talking about here? Who falls into this category? If you've built a comfortable life, a second home, maybe you've got investment accounts, maybe even a family business, you might assume that you've checked all the financial boxes, but there's a lot of risks that are still quietly sitting in the background that could sneak up and come get you. One of the big ones, Bob, is liability.
So this is where an umbrella insurance policy comes in. A lot of people think they're covered until something big happens. So your auto and your homeowners' insurance, that might give you $0.5 million in liability coverage, and you might think that that can check the box, but things can happen that have nothing to do with your car or with you. What happens if your teenager causes a major car accident, somebody is seriously injured at a rental property you have or falls on the ice outside your own home, suddenly you're on the hook for millions of dollars.
That's what an umbrella policy will cover. They're very cheap. Not much to add, maybe $300, $400 dollars to add a million dollars' worth of coverage, but they will cover things that could absolutely sink your ship. That's why it's so cheap. The events that they cover, the risks that they cover, are fairly rare that they're going to occur, so it doesn't cost very much, but if they do occur, they are absolutely ship-sinkers.
Bob: Yeah, it's really one of the best returns on peace of mind out there. It's something to get enough liability coverage to cover basically your net worth in case you get sued, because the higher your net worth goes up, the more of a target you are. And with all the cybersecurity stuff out there and people getting their hands on your information, we're often surprised at how many people know about our situation. And yeah, you wanna take that bullseye off your chest and make sure you're covered in case something wild and crazy happens that we don't see coming down the pike.
Brian: Yeah. So when I bought my umbrella policy, my property and casualty guy pointed it out to me it was something I needed because I was having conversations about the first of, at the time, three coming young drivers. And he basically said, "You're kind of an idiot if you don't do this." And from there, we got into a conversation about what else does it cover? And I basically told him, "throw the whole thing into the boat because any of this stuff can happen to me."
So one of the bigger ones that wasn't really a thing 10, 15 years ago, like you just mentioned it, cyber security. So there's a reason we bring the expert, Dave Hatter, on our show to talk about these things. If you are a wealthier family, then you've got a lot of things out there. You've got a lot of irons on the fire, and a lot of that stuff is tied to internet access. So that makes you a prime target, not just for identity theft, but ransomware, financial fraud, phishing attacks, any way that they can get into your system.
And remember how often we hear about data being exposed in ways that it shouldn't. Just about every big box store, some government agencies, lots of places have exposed your data. So it's not too hard for these criminals to piece lots of things together to figure out that you might be a big, fat tasty target, so they're gonna come after you.
Bob: Well, let's not forget about our kids either. I mean, my youngest son, who's now I think 24, still has a TikTok account. And I mean, we all know how those, you know, there's all these Chinese bots that monitor everything that goes on TikTok. I've tried to get them to cancel that thing for years. I think that younger generations, they love TikTok for some reason, but it exposes them and possibly me to people getting a hold of information. I don't like it. I wish it go away. But yet, that's another reason to have liability protection.
Brian: Come on, Bob. We all know you're a big TikTok star out there. I know you're dancing in front of your phone on a nightly basis just to blow off steam. You can't [crosstalk 00:04:19]
Bob: Well, I did put a credit freeze on all my stuff for that reason. So at least nobody can go borrow money. So anyway, we talked about...
Brian: I don't wanna say you dodged the question.
Bob: We talked about some of the solutions, multi-factor authentication, which I think now really comes with about everything we deal with. And I know people get aggravated by it, but it is there for our protection. And some people, Brian, go to the step of hiring someone like a Dave Hatter, a cyber security consultant, just to take a look at all of our devices and do kind of a one-time sweep to get some of this stuff off of our computers that can make us an easy target.
Brian: Right. And let's drill into that multi-factor authentication stuff a little bit, because I think those are big words that get thrown around. People don't generally understand. Yes, you can hire a consultant, but there are things available on your computers and your phones right now. For example, Google has an authenticator app that's already built into your Android phone, can be downloaded on iOS, and it will generate a random number that you can tie to your bank accounts, to other things. That itself is multi-factor authentication.
Plus, you're already doing multi-factor authentication if the website sends you a text message with a number in it. It's the same kind of thing. But there are apps on your phone built in already that will allow you to put that in place. If you need more than that, then absolutely, go hire a consultant. They'll tell you exactly where your holes are.
Bob: Well, this is good. It sounds like you've already forgotten more than I know about all this stuff. And since your office is right next to mine, how about if I buy you lunch and you come into my office and look at all my stuff and help me get some of this garbage off of all my devices? [crosstalk 00:05:55]
Brian: I will do that in exchange for a personal TikTok dance show by Bob Sponsellor. I will do that.
Bob: You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponsellor, along with Brian James.
An uncoordinated estate plan. This is another thing that people overlook. And this is a big one, Brian. This isn't just about having a will. It's about making sure your legal documents, your financial accounts, your insurance policies, they all work together. In other words, the word that I wanna use here is coordination, Brian. And a lot of times, there's not a whole lot of coordination going on with the overall wealth plans of people, especially the higher their net worth situation becomes.
Brian: Yeah, it's great that you bring this up. I just had a conversation with a brand-new client yesterday. The main reason they wanted an advisor and that they ended up hiring Allworth is simply because they had just settled in a state with a deceased parent that was, as you put it, uncoordinated. So what that means is there was nothing but a will. A lot of times, people just go, I'll have a will written by an attorney and that's gonna check every box, and I'm good to go. But the will, that actually can make things slightly more complicated because that drags probate into it.
And if all you really have, you might have a decent amount of assets, but it's really just financial accounts and relatively simple things, go to each financial institution and simply name beneficiaries on each of those accounts. That takes the will entirely out of the mix. And all those people have to do, your beloved heirs, all they have to do is take a death certificate to your bank and your investment firms and so on and so forth. And they will have accounts set up in their own names and the assets distributed to them within a few days. It's not that complicated. But if you leave it all to the will, the county gets involved.
Bob: Brian, it's not that complicated, but the words that you actually used in your prior comments, go to your various financial institutions, that takes a lot of work, and time, and aggravation that a lot of people don't wanna fool with. Therefore, they don't do anything about it. And one of the main benefits that we perform for our clients here at Allworth is we do the coordination for them. We do the consolidation. We check the beneficiary designations.
We can put a transfer-on-death designation on certain accounts. We take care of that for people so they don't have to be driving around to umpteen different banks and savings institutions to get some of this done. Because you know as well as I do, Brian, if left to their own devices, a lot of this stuff doesn't get done. And that's what rears its ugly head for the heirs down the road when there is a lack of coordination.
Brian: Yeah. And if you're somebody who truly really just wants somebody to handle all of this stuff on your behalf, you may look at putting a lot of things in a trust and hiring a trustee to actively take things over for you now. You can also do that with powers of attorney if you have a trusted attorney or a CPA or just a family friend who wants to handle this for you. What we're referring to here is something called a family office where you basically hire people to run your financial and legal life for you and simply bring you things to sign off on.
Now, these are obviously...there are expenses involved here. You're literally hiring employees in an employment-type relationship. But if you're in a situation where there are that many moving parts to your financial situation, perhaps there's a lot of business entities, maybe real estate, family-limited partnerships, those kinds of things, then, absolutely, you probably want somebody to coordinate it all. That's a good move to make, but it'll come with expenses. But it does take a lot of stuff off your plate.
Bob: Well, Brian, I think so many times, for the clients that I've worked with for years, they see me as the coordinator and appropriately so. And what that means is developing a regular rhythm of communication between their CPA and between their attorney, so we're all working off the same sheet of music and we are keeping things proactively coordinated. And I see that as my job as a fiduciary financial advisor. And I know you do a great job of that as well.
Brian: Yeah. These are all things that come up in the course of a holistic financial planning relationship where we throw all the puzzle pieces on the table and figure out what are our resources, what are we trying to do with them, and then, therefore, what steps do we need to take now so that we get the outcome we want in the future?
Bob: Here's the Allworth advice. Protecting wealth isn't just about investing wisely. It's about defending your financial house from risks that don't show up in a market chart or stock market chart.
Next, a look at what real diversification looks like. You're listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station. You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller along with Brian James. If you can't listen to "Simply Money" every night, subscribe to get our daily podcast. Just search "Simply Money" on the iHeart app or wherever you find your podcasts.
Straight ahead at 6:43, what to do when significant ownership of your company's stock becomes a potential liability. All right. Does this describe you? You've got 5 different accounts or maybe 10, a dozen mutual funds and a couple of ETFs. You think you're diversified, right? But do you know whether those accounts are all holding the same stuff? That's not diversification. That's duplication. And, Brian, we see this all the time.
Brian: Bob, we're gonna go to the story vault here. Let's talk shop a little bit. You probably remember this too. We didn't know each other at the time. About 20 years ago, the Janus funds were just the greatest things ever. And they were all anybody had to have for a couple year period. And there were four of them. Janus Worldwide and Janus Enterprise and two other ones that are lost to history. But the reason everybody loved them was because they were up double digits every single year. So people would say, "I'm just gonna get the Janus IV. That's all I need. Look at these things. They're just doing great."
But if you looked under the hood, which it's a lot easier to do that now than it was then, if you looked under the hood, they all owned mostly the same stocks. So that when things finally turned in 2001, 2002, all those stocks took a beating and all four came down and people who thought they were diversified were completely caught with their pants down because there was nothing in that portfolio to support when the wind started blowing the other way.
So more accounts doesn't mean more protection. That doesn't mean that you have things that offset each other. Having the same stock across four different institutions or the same mutual fund does not protect you at all. It's gonna behave the same way.
Bob: Yeah. If you're gonna take me back 20 years, Brian, do you remember the AIM Weingarten Fund?
Brian: I do.
Bob: That was another fund that just they were selling this as the widows' and orphans' fund. It could never go down, and lo and behold, it had 60-some percent in tech stocks. And when we had the tech bubble in 2000 to 2002, boy, did that take a hit, and boy, were people shocked and disappointed, and in a lot of cases, angry.
All right. Well, back to what we wanna do about it. You know, we run into people all the time. You know, the more institutions you have, and the more, you know, accounts you have, what I like to tell people is you've got a great collection of products, but you don't have a strategy. And you don't have as much diversification as you think.
And to your point, Brian, the more institutions and funds and all that you spread yourself out among, you tend to...when you actually look at what is comprising these funds, people are amazed when you own the same stocks in those funds. And, you know, you look at the S&P getting as high as 30% to 35% over the last year in these Mag 7 stocks, people think because they have 500, 600 companies in their portfolio, that they're diversified, they really are not.
Brian: Right. And you have to look also at how some of these index funds, how they actually work, right? So an S&P 500, a lot of people think, "Well, that's 500 different stocks, I've got evenly spread across 500." Well, that's not the case. The S&P 500 itself is capitalization weighted, meaning the bigger the stock is in reality, the more of the S&P, the more of the index it makes up, it's not divided evenly across 500 different stocks.
So to your point, those Mag 7 stocks are the ones that are driving the S&P 500 right now. You can specifically look for other funds that do not have that risk same 500 companies, but equally weighted as opposed to cap weighted. But you have to understand what these things own or what's under the hood of all these various mutual funds and exchange-traded funds, ETFs that you probably have.
They do serve the purpose of I own one thing that owns underneath it 500, maybe 1000 different things. They can serve the role of being the sort of the Kellogg's variety pack, if you remember that from your family vacations, buy one thing that has a bunch of different things in it. So it is diversified that way, but you have to understand what those things are so that you can make sure you're not duplicating. Even though I have the ABC and the XYZ fund, they're both the same. That's a risk.
Bob: Well, we only have to go back about six weeks, Brian, to look at what can happen when the market takes a turn. And you are overallocated without knowing it, in some cases, with a lot of overlap in certain companies and certain industries. When that volatility comes, and it always does, that's where you can see what actually happens in real time with your own money, when you're a little under-diversified.
So let's talk about what real diversification looks like. At its core, it means owning investments that respond differently to different economic conditions. And our industry likes to throw around a lot of terminology, like negative correlation, and all that. All that means is having some things in your portfolio that zig when other things zag.
Brian: The market gets distracted by different things at different times. When we're in a rising rate environment, that means we wanna own a certain type of bonds, for example. And sometimes we will pivot away from that, the pendulum swings back the other way. And we'll pivot away from that rising rate environment, we'll sit in a flat rate environment. And that means we need to change those bonds out to something that reflects a little bit more accurately what that portfolio needs to do. And then we'll be on the other side where the rates start to drop whenever the government feels like we need to sort of goose the system a little bit. All three of those scenarios require different types of holdings.
In addition, most people think about stocks anyway, when we're talking about diversification. At any given time, the herd wants to shy away from one type of thing and invest in something else. This is why we have that term. There are stocks called defensive stocks. Defensive simply means, for example, grocery stores. Right? No matter what's going on, grocery stores are gonna make money.
We may not go to Best Buy and buy that new gigantic TV when the economy is a little bumpy, but we are sure gonna go buy a loaf of bread and a bottle of milk on the way home. That's a defensive stock. So the market will be attracted to the types of things that it feels like are gonna do better in the very short run. And then as things clear up, we'll move toward a more growth approach. But that's the reason... We can't predict the timing of these swings. That's why we need to own all of them at the same time and make sure we're diversified.
Bob: You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller, along with Brian James.
Brian, let's get into how a lot of this duplication happens for clients. And look, it's often unintentional. You open an account here, you do a rollover IRA there, you've got three or four different advisors that adds new funds, and all of a sudden, you've got this collection of products without a strategy, that I alluded to before.
Sometimes people think they're being cautious, and they are diversifying by spreading money across different firms. But if the advisors at these different firms, you and I know this, Brian, they don't talk to one another, they don't coordinate with one another, they're competitors.
Brian: And that makes...
Bob: So the more you spread across your institutional exposure, you're actually defeating the purpose of what you're trying to do, which is build a consolidated diversified portfolio, especially if you've got three or four advisors all doing certain things with your money and not talking to one another.
Brian: Yeah, I'm thinking of an example. About a month ago, I had a client who was doing kind of the same thing. We worked with her for a long time, and she inherited some assets from her deceased parents, and she decided to keep those with the other advisor. Didn't take very long before she realized that that made her the advisor, because we would share our thoughts. She would talk to the other side, who was a perfectly legitimate firm. You know, there's a lot of... We're good at what we do, but we're not the only ones.
And they would share some thoughts too, and it was up to her to coordinate to make sure that we can't see what each other is doing. So it was up to her to make sure that there wasn't a lot of overlap. She eventually got fed up with that and ended up deciding just to bring it all to Allworth and have us deal with it just to remove that sense of conflict. And so again, having two is gonna can cause more trouble than it could solve.
Bob: Well, this is where just a simple portfolio analysis can really help. And this doesn't mean fire all your other advisors and move all your money with one advisor and one fell swoop. But most good, well-intentioned fiduciary advisors will do, for no cost or no obligation, a thorough portfolio analysis where we take all your statements.
And there's really nice software available today where you can show a client, here's what you really own. Here's how it's broken down by asset class. Here's some of the risks inherent with the allocation you currently have. And, Brian, that helps people make an informed decision on how to proceed going further. I find that to be very useful and helpful. And potential clients really like that when we take the time to do that for them.
Brian: Yeah, I think that's great advice. Just understand like a lot of things we talk about. Step back, look at your big picture, and understand what you have and what you're trying to do with it.
Bob: Here's the Allworth advice. Ask yourself, am I diversified or just busy? Because in investing, motion doesn't always mean progress. Coming up next, how to fireproof your finances from family drama. You're listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station. You're listening to "Simply Money," presented by Alworth Financial. I'm Bob Sponseller, along with Brian James.
Time to tackle everyone's favorite topic, money and family. What a loaded topic that is, Brian. And when they don't mix, money and family don't mix, boy, the sparks can fly. And we're not just talking about who gets grandma's China. We're talking about real money, inherited wealth, business succession planning, estate planning decisions. And what happens when your kids, your spouse, or your siblings don't see eye to eye. It's a very important topic that we're gonna get into here, Brian.
Brian: You know, Bob, one of my very first lessons as to how people can be when I became an adult and I was a young financial advisor, I got a phone call from somebody who was in the hearse, their father's hearse on their way to the cemetery, wanting to know if they could stop by the office and pick up their money. And I'm using air quotes. I wanna pick up my money because it's in a shoe box with my name on it. Obviously, that's not exact. That's not a very common scenario. But people do think funny about money. And they're different, no matter if they're in the same family. Everybody has different opinions on it.
So one of the big things we can run into is values versus vision. What this means is you've got a parent who built their wealth by being frugal, disciplined. Maybe they started a business, which is its own huge lift to carry. You've got the next generation that all they know was that they didn't really want for anything. They kind of got whatever they wanted. Did not have to put that same amount of blood, sweat, and tears into growing that wealth. Their goals are very different. Their priorities are different.
So we see this all the time where the parents are the ones who wanna preserve that wealth. And the kids kind of assume that it's always there. They wanna use it to start a nonprofit, which is a very honorable thing to do. But it's a very different mindset than trying to grow something to provide for future generations.
So one child might be conservative with money. The other one's ready to kind of live it up. And YOLO, you only live once and kind of live that life of luxury. Maybe launch a music career, take a swing for the fences, that kind of thing. That's where the friction starts. When you've got those two children who are arguing over what mom and dad built and how we are treating it now.
Bob: Well, and I'm dealing with a situation right now, Brian, involving a closely held business where this couple has four kids. Two of the kids are actively involved in the business now. I mean, it's their livelihood. It's their paycheck. They are putting blood, sweat, and tears into that business. The two other kids have nothing to do with the business. But this is a significant chunk of this couple, meaning the parents' net worth. And when they came and met with me, they had done zero estate planning.
They knew it was the elephant in the room, but they hadn't really sat down and talked and thought through it as spouses to say nothing of sitting down with their kids. And the good thing is, I brought in an attorney that I've worked with for years that is wonderful at working with closely-held business owner clients. And, Brian, in the course of about an hour and a half, we were able to sit down together in one room, throw around some ideas, and come up with an actual plan that we think is gonna make everyone happy. And boy, was that a gamechanger for that family to head off some potential discord down the road.
Brian: Yeah, you said the key word. The word is plan, just basically meaning, have this conversation in advance, not on the deathbed or at the estate settlement meeting with all the attorneys. So I'm reminded of another situation I had years ago where there are two brothers who owned a business and they both knew... They were about the same age and they knew they'd wanna get out at the same time, but they both felt kind of equally about the business. They could continue it or they could bow out at the right price.
So what their agreement was, was that they were gonna agree or one of them would come up with the value of the firm. Here's what the price of this firm is worth and we're gonna split it in half. And then the other would decide whether he was gonna buy or sell. And that worked out perfectly because that forced them both to be honest about their intentions. If I'm gonna value my own business, but I don't know whether I'm on the buying or selling end, then it's gonna be a pretty fair valuation.
So that's kind of a unique situation. It did work out really well for those two guys, but the whole point is they had that discussion well in advance of any actual settlement of this thing. For a lot of people, like you said, it's gonna involve bringing an attorney into the mix, bringing everyone to the table, and just talking about what is important to you. What do you wanna have as a memory of mom and dad? Do you want the business? Do you not want anything to do with it? Lay it all out. And then after everybody understands the different points of view, don't do anything. Exhale. Everybody go think about it, then come back to the table and see where we land.
Bob: Yeah. And even if we're not talking about ownership of a family business, just basic estate planning, you know, when you've got multiple kids or grandkids or what have you, as you've already mentioned, Brian, everybody's interest in, you know, their preferences can be different. And that's where you can get creative. It doesn't mean overcomplicate things, but we might have one kid in the family that's maybe not very responsible with money. And you don't wanna just dump a couple million dollars on them on one day when you pass away because they're not prepared to handle it.
And that's where you could put some contingencies into that trust to dole that money out over time. You can tie that with some incentives, you know, to hopefully motivate them to do some right things with that money rather than blow it. There's some creative things you can do with trust and estate planning, but you got to get out ahead of it, you know, proactively to make sure you don't leave a mess, you know, for those, you know, coming in the next generation.
Brian: Right. So you can do some mechanical things. You can use what's called a discretionary trust. That's the trustee. So the trustee decides on your behalf how and when children get access to the funds. That way they don't have a blank check. Well-drafted trust can protect assets from ex-spouses as well. And there's plenty of other toys you can play with there.
Bob: Here's the Allworth advice. You don't just pass on money. You pass on meaning. Protecting your legacy means protecting your family from the drama that unmanaged wealth can create. Coming up next, how to manage the risks of holding too much company stock. You're listening to "Simply Money," presented by Allworth Financial on 55 KRC, THE Talk Station.
You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. You have a financial question you'd like for us to answer. There's a red button you can click while you're listening to the show right there on the iHeart app. Simply record your question and it'll come straight to us. All right, you've worked hard. You've climbed the company ladder. Or maybe you've built the business from the ground up. But now you're sitting on a whole lot of one thing. Your company stock.
Brian: Yeah, company stock is not a bad thing at all, right? We should get paid, you know, we should be compensated when our company does well. The risk, however, though, and there's a lot of companies that put their customer or their employees in this situation is that now a lot of your financial stability is tied to it. Your salary comes from this company. If you've got your, you know, a large chunk or sometimes all of it. I still see that every now and then. Sometimes every nickel of it is in the employer stock. Then everything you have in this universe is tied to that company. And if it goes under, well, then that's gonna take everything with it.
We haven't heard a story like this in a very long time, but if the name Enron rings a bell, Enron was the Procter & Gamble of Houston, and was being the key word. It no longer exists and it basically evaporated overnight because it was all a house of cards. Lehman Brothers, slightly different story, but they made too many bets in too many bad places. These are companies that went poof overnight and they took obviously the market.
These things triggered market downturns, which dragged 401ks down just in general across the country. But if you had company stock in those firms and a large chunk of it, then you lost a heck of a lot more, you know, than a simple diversified portfolio would have lost in those downtimes. A hundred percent loss, of course, in the case of Enron. So these are things you wanna pay attention to. Make sure you know what position you're in.
Bob: Well, we don't have to see a company entirely implode like an Enron or Lehman Brothers. Those are pretty severe examples. You know, they're real, but they're extreme. I mean, just a big market decline or a change in a company's structure or earnings report, anything can cause a lot of unexpected volatility when you're overexposed to any one company.
So, Brian, let's talk about how people get stuck in this situation. Why do people find themselves? And let's face it, we're talking about well-educated, very intelligent people in most cases. Why did they get stuck in this position of being so highly concentrated in one position?
Brian: Yeah. So first, it starts off with a generous benefits package. So you're rewarded in this company's stock year after year. We're talking about restricted stock, stock options, employee stock purchase plans, things like that. You might even bought more on your own. And a lot of times they entice you with perhaps a 15% discount. So in other words, if the stock is worth 10 bucks a share on the market, you're able to buy it as an employee for $8.50, meaning there's an instant 15% gain. That's hard to resist.
And a lot of it comes from simply loyalty. I believe in this company. I'm familiar with it. I know it. I do this stuff every single day. I can do it in my sleep. So I understand it better than anything else that might be sitting inside a mutual fund. And then after some time, after you've been in this situation, eventually it becomes taxes, Bob. If I sell, I'll owe too much. Therefore, I'm never gonna sell. I just had this conversation with a client yesterday who has had stocks that he's owned for 40-some years and he doesn't have the capital gains. Let alone that he doesn't wanna pay it, he doesn't have the data to even know what the capital gain is.
So he's stuck in a situation where he says, "It's gonna cost so much to sell this. I'm just never gonna sell it." That's great. But as your advisor, I need to take it out of your financial plan. If you have walled it off because you don't wanna give a nickel to the IRS, then it is not an asset for you. So either need to solve that problem or find another way to work your financial plan around it. That tax can feel like a punishment. So people just hang on and hang on.
Bob: You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. Yeah. When people don't even understand what their tax exposure is, I think sometimes they underestimate what can be done with some proper planning. And, Brian, just within the last, I'll say 5 to 10 years, there's been a lot of really nice strategies come down the road to help people gradually get out of these concentrated stock positions with way less income tax exposure and capital gain exposure than they ever thought possible.
Brian: Yeah. There are vehicles out there such as exchange funds. An exchange fund is something where a lot of people who own diversified, or I'm sorry, the whole point is that they're not diversified, who own a single stock, own a big position in one thing. If I have 50 different people who have nothing to do with each other, who have too much in one stock, those 50 stocks probably make up a decent portfolio.
So there's something called an exchange fund where everybody can contribute their stock as is and receive, in exchange, a share of that whole pile of stocks. The point of that is you didn't sell it. The IRS does not recognize that as a sale. You exchanged it for a different pile of securities. So that is a way to diversify the risk without actually selling it. There's other things you can do as well. You can also do what's called a collar around a major position, which basically means you place option trades on the upside and the downside, and that will at least restrict the stock.
It can't go through the floor because you'd have an option in place to protect that. Also, won't grow to the sky. Should the thing 10x in the next couple of years, it's not gonna help you because you have something else on the top side. But when we've got this situation, the main thing we're trying to protect from is a massive loss from something unpredicted that can happen to any company out there.
Bob: Other things we talk to our clients about are more gradual selling strategies, and this is where we can dovetail a client's charitable intentions or goals with gradually diversifying out of these highly concentrated positions. Things like charitable remainder trust, donor advised funds, where you can give a chunk of this stock away, get all the tax benefits now, avoid the capital gains taxes, entirely avoid them, and dole that money out to charities over time.
In the case of a charitable remainder trust, you can retain an income stream from what you gave away if that's something you need to do. It can literally be a win-win for everybody except the IRS, and you don't need to dump everything overnight. And what this comes down to is a well-planned multi-year approach, especially in coordination with your income and your tax strategy, and that can really soften the tax hit while getting you out of this concentrated position that exposes your overall portfolio to too much volatility and risk.
Brian: Bob, I'm gonna take a step back even before that. Those are great entities that can be set up, but before you even do that, one simple thing you can do, if you regularly give money to some charity, a church or some other kind of charity or whatever out there, you can simply give them the stock. You don't have to write a check.
Bob: Yup. Absolutely.
Brian: Give them the shares of the stock directly. All you have to do is contact the development person, whoever handles that for that charity, and they know how this game works. They're gonna give you something called a DTC number and an account number, and they'll tell you where their investment account is held. You provide that to whatever firm is holding your shares and tell them, "I wanna send 100 shares of Procter & Gamble," for example. The IRS does not recognize that as a sale. You did not sell it. You simply gave it to a charity.
The charity, of course, is a 501C3, meaning it doesn't pay taxes. They sell it, and they will most likely do so instantly because they don't wanna speculate. They just need the cash. They sell it and do not incur any taxes. So you get the credit for having given them the same dollar amount that you give them every single year, but you don't have to pay any taxes for having liquidated it.
Bob: Great stuff, Brian. Here's the Allworth advice. Your company helped you build your wealth. Now your wealth has a new job, protecting your future. You're listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. Brian, I wanna take a few minutes to just really get on my high horse about what we talked about earlier in the show, and that's just the importance of having a truly coordinated financial plan and the value that a good fiduciary advisor can bring to the table in that area.
And I'm thinking of a meeting I had earlier this week with a new client that's coming on board or looking at hiring us. Brian, this was a two-hour meeting. At the beginning of the meeting, they shared a little bit of information and asked a lot of questions. The more I answered the questions, the more information was shared. As we went on, I found out just what we talked about. Stuff is in five or six different places with four or five different advisors, no coordinated strategy.
And I explained the fact that we don't have to take over management of everything in one day to add the value of a truly comprehensive financial investment and tax strategy, because you don't have that today. And the longer that meeting went on and the more comfort they had with that whole concept, which they had never experienced before, they were more and more open to sharing information. And I think it set the table for a good relationship going forward where we can really add the value to their situation that, Brian, honestly, I think they've been looking for 20 plus years and have never found. I'm sure you've had similar meetings.
Brian: Yeah. And I'm thinking back over my past. When I first got started, everything was product-based. It was everybody knew a guy who had a hot stock tip from last month or the Janus mutual fund or the AIM Weingarten fund or whatever. Something out there that was just the coolest thing ever. It was all we are gonna need to own for this. It was all product-based and it would change every year too. And that's nothing to build a career on, let alone a fiduciary relationship.
So eventually, it pivoted to what am I gonna do with all this? How does it all fit together? And I think nowadays, when we talk to new clients or prospective clients, the very first thing they say is, "Well, all we really talk about with my advisors is what the market did last quarter and what we think it might do this quarter, which nobody knows anyway. And I don't really get the point of this anymore. How are these people helping me? I'm in a different situation now. I got a lot of moving parts to my situation. I'm about to retire. I've got social security decisions to make. I got a pension, maybe a business to sell. How does all this coordinate together? How do I get the conversation off of just what is this pile of money doing? There's so many more moving parts nowadays.
Bob: Yeah, you repeated that key word, coordination. Coordination. And that's really the value-add that comes from having a good, qualified fiduciary financial advisor on your team.
Thank you for listening. You've been listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.
Tonight, we're shining a light on something that doesn't get nearly enough attention, and that's the hidden risks financially comfortable families often overlook. When we say financially comfortable, we're talking about everyday folks, not the high rollers and multi-millionaires like Brian, who fly around on private jets.
Brian: Yeah. I meant to tell you, Bob, I scratched your car in the parking lot this morning with my private jet. My bad. Came in a little too hot. Yeah, so who are we talking about here? Who falls into this category? If you've built a comfortable life, a second home, maybe you've got investment accounts, maybe even a family business, you might assume that you've checked all the financial boxes, but there's a lot of risks that are still quietly sitting in the background that could sneak up and come get you. One of the big ones, Bob, is liability.
So this is where an umbrella insurance policy comes in. A lot of people think they're covered until something big happens. So your auto and your homeowners' insurance, that might give you $0.5 million in liability coverage, and you might think that that can check the box, but things can happen that have nothing to do with your car or with you. What happens if your teenager causes a major car accident, somebody is seriously injured at a rental property you have or falls on the ice outside your own home, suddenly you're on the hook for millions of dollars.
That's what an umbrella policy will cover. They're very cheap. Not much to add, maybe $300, $400 dollars to add a million dollars' worth of coverage, but they will cover things that could absolutely sink your ship. That's why it's so cheap. The events that they cover, the risks that they cover, are fairly rare that they're going to occur, so it doesn't cost very much, but if they do occur, they are absolutely ship-sinkers.
Bob: Yeah, it's really one of the best returns on peace of mind out there. It's something to get enough liability coverage to cover basically your net worth in case you get sued, because the higher your net worth goes up, the more of a target you are. And with all the cybersecurity stuff out there and people getting their hands on your information, we're often surprised at how many people know about our situation. And yeah, you wanna take that bullseye off your chest and make sure you're covered in case something wild and crazy happens that we don't see coming down the pike.
Brian: Yeah. So when I bought my umbrella policy, my property and casualty guy pointed it out to me it was something I needed because I was having conversations about the first of, at the time, three coming young drivers. And he basically said, "You're kind of an idiot if you don't do this." And from there, we got into a conversation about what else does it cover? And I basically told him, "throw the whole thing into the boat because any of this stuff can happen to me."
So one of the bigger ones that wasn't really a thing 10, 15 years ago, like you just mentioned it, cyber security. So there's a reason we bring the expert, Dave Hatter, on our show to talk about these things. If you are a wealthier family, then you've got a lot of things out there. You've got a lot of irons on the fire, and a lot of that stuff is tied to internet access. So that makes you a prime target, not just for identity theft, but ransomware, financial fraud, phishing attacks, any way that they can get into your system.
And remember how often we hear about data being exposed in ways that it shouldn't. Just about every big box store, some government agencies, lots of places have exposed your data. So it's not too hard for these criminals to piece lots of things together to figure out that you might be a big, fat tasty target, so they're gonna come after you.
Bob: Well, let's not forget about our kids either. I mean, my youngest son, who's now I think 24, still has a TikTok account. And I mean, we all know how those, you know, there's all these Chinese bots that monitor everything that goes on TikTok. I've tried to get them to cancel that thing for years. I think that younger generations, they love TikTok for some reason, but it exposes them and possibly me to people getting a hold of information. I don't like it. I wish it go away. But yet, that's another reason to have liability protection.
Brian: Come on, Bob. We all know you're a big TikTok star out there. I know you're dancing in front of your phone on a nightly basis just to blow off steam. You can't [crosstalk 00:04:19]
Bob: Well, I did put a credit freeze on all my stuff for that reason. So at least nobody can go borrow money. So anyway, we talked about...
Brian: I don't wanna say you dodged the question.
Bob: We talked about some of the solutions, multi-factor authentication, which I think now really comes with about everything we deal with. And I know people get aggravated by it, but it is there for our protection. And some people, Brian, go to the step of hiring someone like a Dave Hatter, a cyber security consultant, just to take a look at all of our devices and do kind of a one-time sweep to get some of this stuff off of our computers that can make us an easy target.
Brian: Right. And let's drill into that multi-factor authentication stuff a little bit, because I think those are big words that get thrown around. People don't generally understand. Yes, you can hire a consultant, but there are things available on your computers and your phones right now. For example, Google has an authenticator app that's already built into your Android phone, can be downloaded on iOS, and it will generate a random number that you can tie to your bank accounts, to other things. That itself is multi-factor authentication.
Plus, you're already doing multi-factor authentication if the website sends you a text message with a number in it. It's the same kind of thing. But there are apps on your phone built in already that will allow you to put that in place. If you need more than that, then absolutely, go hire a consultant. They'll tell you exactly where your holes are.
Bob: Well, this is good. It sounds like you've already forgotten more than I know about all this stuff. And since your office is right next to mine, how about if I buy you lunch and you come into my office and look at all my stuff and help me get some of this garbage off of all my devices? [crosstalk 00:05:55]
Brian: I will do that in exchange for a personal TikTok dance show by Bob Sponsellor. I will do that.
Bob: You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponsellor, along with Brian James.
An uncoordinated estate plan. This is another thing that people overlook. And this is a big one, Brian. This isn't just about having a will. It's about making sure your legal documents, your financial accounts, your insurance policies, they all work together. In other words, the word that I wanna use here is coordination, Brian. And a lot of times, there's not a whole lot of coordination going on with the overall wealth plans of people, especially the higher their net worth situation becomes.
Brian: Yeah, it's great that you bring this up. I just had a conversation with a brand-new client yesterday. The main reason they wanted an advisor and that they ended up hiring Allworth is simply because they had just settled in a state with a deceased parent that was, as you put it, uncoordinated. So what that means is there was nothing but a will. A lot of times, people just go, I'll have a will written by an attorney and that's gonna check every box, and I'm good to go. But the will, that actually can make things slightly more complicated because that drags probate into it.
And if all you really have, you might have a decent amount of assets, but it's really just financial accounts and relatively simple things, go to each financial institution and simply name beneficiaries on each of those accounts. That takes the will entirely out of the mix. And all those people have to do, your beloved heirs, all they have to do is take a death certificate to your bank and your investment firms and so on and so forth. And they will have accounts set up in their own names and the assets distributed to them within a few days. It's not that complicated. But if you leave it all to the will, the county gets involved.
Bob: Brian, it's not that complicated, but the words that you actually used in your prior comments, go to your various financial institutions, that takes a lot of work, and time, and aggravation that a lot of people don't wanna fool with. Therefore, they don't do anything about it. And one of the main benefits that we perform for our clients here at Allworth is we do the coordination for them. We do the consolidation. We check the beneficiary designations.
We can put a transfer-on-death designation on certain accounts. We take care of that for people so they don't have to be driving around to umpteen different banks and savings institutions to get some of this done. Because you know as well as I do, Brian, if left to their own devices, a lot of this stuff doesn't get done. And that's what rears its ugly head for the heirs down the road when there is a lack of coordination.
Brian: Yeah. And if you're somebody who truly really just wants somebody to handle all of this stuff on your behalf, you may look at putting a lot of things in a trust and hiring a trustee to actively take things over for you now. You can also do that with powers of attorney if you have a trusted attorney or a CPA or just a family friend who wants to handle this for you. What we're referring to here is something called a family office where you basically hire people to run your financial and legal life for you and simply bring you things to sign off on.
Now, these are obviously...there are expenses involved here. You're literally hiring employees in an employment-type relationship. But if you're in a situation where there are that many moving parts to your financial situation, perhaps there's a lot of business entities, maybe real estate, family-limited partnerships, those kinds of things, then, absolutely, you probably want somebody to coordinate it all. That's a good move to make, but it'll come with expenses. But it does take a lot of stuff off your plate.
Bob: Well, Brian, I think so many times, for the clients that I've worked with for years, they see me as the coordinator and appropriately so. And what that means is developing a regular rhythm of communication between their CPA and between their attorney, so we're all working off the same sheet of music and we are keeping things proactively coordinated. And I see that as my job as a fiduciary financial advisor. And I know you do a great job of that as well.
Brian: Yeah. These are all things that come up in the course of a holistic financial planning relationship where we throw all the puzzle pieces on the table and figure out what are our resources, what are we trying to do with them, and then, therefore, what steps do we need to take now so that we get the outcome we want in the future?
Bob: Here's the Allworth advice. Protecting wealth isn't just about investing wisely. It's about defending your financial house from risks that don't show up in a market chart or stock market chart.
Next, a look at what real diversification looks like. You're listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station. You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller along with Brian James. If you can't listen to "Simply Money" every night, subscribe to get our daily podcast. Just search "Simply Money" on the iHeart app or wherever you find your podcasts.
Straight ahead at 6:43, what to do when significant ownership of your company's stock becomes a potential liability. All right. Does this describe you? You've got 5 different accounts or maybe 10, a dozen mutual funds and a couple of ETFs. You think you're diversified, right? But do you know whether those accounts are all holding the same stuff? That's not diversification. That's duplication. And, Brian, we see this all the time.
Brian: Bob, we're gonna go to the story vault here. Let's talk shop a little bit. You probably remember this too. We didn't know each other at the time. About 20 years ago, the Janus funds were just the greatest things ever. And they were all anybody had to have for a couple year period. And there were four of them. Janus Worldwide and Janus Enterprise and two other ones that are lost to history. But the reason everybody loved them was because they were up double digits every single year. So people would say, "I'm just gonna get the Janus IV. That's all I need. Look at these things. They're just doing great."
But if you looked under the hood, which it's a lot easier to do that now than it was then, if you looked under the hood, they all owned mostly the same stocks. So that when things finally turned in 2001, 2002, all those stocks took a beating and all four came down and people who thought they were diversified were completely caught with their pants down because there was nothing in that portfolio to support when the wind started blowing the other way.
So more accounts doesn't mean more protection. That doesn't mean that you have things that offset each other. Having the same stock across four different institutions or the same mutual fund does not protect you at all. It's gonna behave the same way.
Bob: Yeah. If you're gonna take me back 20 years, Brian, do you remember the AIM Weingarten Fund?
Brian: I do.
Bob: That was another fund that just they were selling this as the widows' and orphans' fund. It could never go down, and lo and behold, it had 60-some percent in tech stocks. And when we had the tech bubble in 2000 to 2002, boy, did that take a hit, and boy, were people shocked and disappointed, and in a lot of cases, angry.
All right. Well, back to what we wanna do about it. You know, we run into people all the time. You know, the more institutions you have, and the more, you know, accounts you have, what I like to tell people is you've got a great collection of products, but you don't have a strategy. And you don't have as much diversification as you think.
And to your point, Brian, the more institutions and funds and all that you spread yourself out among, you tend to...when you actually look at what is comprising these funds, people are amazed when you own the same stocks in those funds. And, you know, you look at the S&P getting as high as 30% to 35% over the last year in these Mag 7 stocks, people think because they have 500, 600 companies in their portfolio, that they're diversified, they really are not.
Brian: Right. And you have to look also at how some of these index funds, how they actually work, right? So an S&P 500, a lot of people think, "Well, that's 500 different stocks, I've got evenly spread across 500." Well, that's not the case. The S&P 500 itself is capitalization weighted, meaning the bigger the stock is in reality, the more of the S&P, the more of the index it makes up, it's not divided evenly across 500 different stocks.
So to your point, those Mag 7 stocks are the ones that are driving the S&P 500 right now. You can specifically look for other funds that do not have that risk same 500 companies, but equally weighted as opposed to cap weighted. But you have to understand what these things own or what's under the hood of all these various mutual funds and exchange-traded funds, ETFs that you probably have.
They do serve the purpose of I own one thing that owns underneath it 500, maybe 1000 different things. They can serve the role of being the sort of the Kellogg's variety pack, if you remember that from your family vacations, buy one thing that has a bunch of different things in it. So it is diversified that way, but you have to understand what those things are so that you can make sure you're not duplicating. Even though I have the ABC and the XYZ fund, they're both the same. That's a risk.
Bob: Well, we only have to go back about six weeks, Brian, to look at what can happen when the market takes a turn. And you are overallocated without knowing it, in some cases, with a lot of overlap in certain companies and certain industries. When that volatility comes, and it always does, that's where you can see what actually happens in real time with your own money, when you're a little under-diversified.
So let's talk about what real diversification looks like. At its core, it means owning investments that respond differently to different economic conditions. And our industry likes to throw around a lot of terminology, like negative correlation, and all that. All that means is having some things in your portfolio that zig when other things zag.
Brian: The market gets distracted by different things at different times. When we're in a rising rate environment, that means we wanna own a certain type of bonds, for example. And sometimes we will pivot away from that, the pendulum swings back the other way. And we'll pivot away from that rising rate environment, we'll sit in a flat rate environment. And that means we need to change those bonds out to something that reflects a little bit more accurately what that portfolio needs to do. And then we'll be on the other side where the rates start to drop whenever the government feels like we need to sort of goose the system a little bit. All three of those scenarios require different types of holdings.
In addition, most people think about stocks anyway, when we're talking about diversification. At any given time, the herd wants to shy away from one type of thing and invest in something else. This is why we have that term. There are stocks called defensive stocks. Defensive simply means, for example, grocery stores. Right? No matter what's going on, grocery stores are gonna make money.
We may not go to Best Buy and buy that new gigantic TV when the economy is a little bumpy, but we are sure gonna go buy a loaf of bread and a bottle of milk on the way home. That's a defensive stock. So the market will be attracted to the types of things that it feels like are gonna do better in the very short run. And then as things clear up, we'll move toward a more growth approach. But that's the reason... We can't predict the timing of these swings. That's why we need to own all of them at the same time and make sure we're diversified.
Bob: You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller, along with Brian James.
Brian, let's get into how a lot of this duplication happens for clients. And look, it's often unintentional. You open an account here, you do a rollover IRA there, you've got three or four different advisors that adds new funds, and all of a sudden, you've got this collection of products without a strategy, that I alluded to before.
Sometimes people think they're being cautious, and they are diversifying by spreading money across different firms. But if the advisors at these different firms, you and I know this, Brian, they don't talk to one another, they don't coordinate with one another, they're competitors.
Brian: And that makes...
Bob: So the more you spread across your institutional exposure, you're actually defeating the purpose of what you're trying to do, which is build a consolidated diversified portfolio, especially if you've got three or four advisors all doing certain things with your money and not talking to one another.
Brian: Yeah, I'm thinking of an example. About a month ago, I had a client who was doing kind of the same thing. We worked with her for a long time, and she inherited some assets from her deceased parents, and she decided to keep those with the other advisor. Didn't take very long before she realized that that made her the advisor, because we would share our thoughts. She would talk to the other side, who was a perfectly legitimate firm. You know, there's a lot of... We're good at what we do, but we're not the only ones.
And they would share some thoughts too, and it was up to her to coordinate to make sure that we can't see what each other is doing. So it was up to her to make sure that there wasn't a lot of overlap. She eventually got fed up with that and ended up deciding just to bring it all to Allworth and have us deal with it just to remove that sense of conflict. And so again, having two is gonna can cause more trouble than it could solve.
Bob: Well, this is where just a simple portfolio analysis can really help. And this doesn't mean fire all your other advisors and move all your money with one advisor and one fell swoop. But most good, well-intentioned fiduciary advisors will do, for no cost or no obligation, a thorough portfolio analysis where we take all your statements.
And there's really nice software available today where you can show a client, here's what you really own. Here's how it's broken down by asset class. Here's some of the risks inherent with the allocation you currently have. And, Brian, that helps people make an informed decision on how to proceed going further. I find that to be very useful and helpful. And potential clients really like that when we take the time to do that for them.
Brian: Yeah, I think that's great advice. Just understand like a lot of things we talk about. Step back, look at your big picture, and understand what you have and what you're trying to do with it.
Bob: Here's the Allworth advice. Ask yourself, am I diversified or just busy? Because in investing, motion doesn't always mean progress. Coming up next, how to fireproof your finances from family drama. You're listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station. You're listening to "Simply Money," presented by Alworth Financial. I'm Bob Sponseller, along with Brian James.
Time to tackle everyone's favorite topic, money and family. What a loaded topic that is, Brian. And when they don't mix, money and family don't mix, boy, the sparks can fly. And we're not just talking about who gets grandma's China. We're talking about real money, inherited wealth, business succession planning, estate planning decisions. And what happens when your kids, your spouse, or your siblings don't see eye to eye. It's a very important topic that we're gonna get into here, Brian.
Brian: You know, Bob, one of my very first lessons as to how people can be when I became an adult and I was a young financial advisor, I got a phone call from somebody who was in the hearse, their father's hearse on their way to the cemetery, wanting to know if they could stop by the office and pick up their money. And I'm using air quotes. I wanna pick up my money because it's in a shoe box with my name on it. Obviously, that's not exact. That's not a very common scenario. But people do think funny about money. And they're different, no matter if they're in the same family. Everybody has different opinions on it.
So one of the big things we can run into is values versus vision. What this means is you've got a parent who built their wealth by being frugal, disciplined. Maybe they started a business, which is its own huge lift to carry. You've got the next generation that all they know was that they didn't really want for anything. They kind of got whatever they wanted. Did not have to put that same amount of blood, sweat, and tears into growing that wealth. Their goals are very different. Their priorities are different.
So we see this all the time where the parents are the ones who wanna preserve that wealth. And the kids kind of assume that it's always there. They wanna use it to start a nonprofit, which is a very honorable thing to do. But it's a very different mindset than trying to grow something to provide for future generations.
So one child might be conservative with money. The other one's ready to kind of live it up. And YOLO, you only live once and kind of live that life of luxury. Maybe launch a music career, take a swing for the fences, that kind of thing. That's where the friction starts. When you've got those two children who are arguing over what mom and dad built and how we are treating it now.
Bob: Well, and I'm dealing with a situation right now, Brian, involving a closely held business where this couple has four kids. Two of the kids are actively involved in the business now. I mean, it's their livelihood. It's their paycheck. They are putting blood, sweat, and tears into that business. The two other kids have nothing to do with the business. But this is a significant chunk of this couple, meaning the parents' net worth. And when they came and met with me, they had done zero estate planning.
They knew it was the elephant in the room, but they hadn't really sat down and talked and thought through it as spouses to say nothing of sitting down with their kids. And the good thing is, I brought in an attorney that I've worked with for years that is wonderful at working with closely-held business owner clients. And, Brian, in the course of about an hour and a half, we were able to sit down together in one room, throw around some ideas, and come up with an actual plan that we think is gonna make everyone happy. And boy, was that a gamechanger for that family to head off some potential discord down the road.
Brian: Yeah, you said the key word. The word is plan, just basically meaning, have this conversation in advance, not on the deathbed or at the estate settlement meeting with all the attorneys. So I'm reminded of another situation I had years ago where there are two brothers who owned a business and they both knew... They were about the same age and they knew they'd wanna get out at the same time, but they both felt kind of equally about the business. They could continue it or they could bow out at the right price.
So what their agreement was, was that they were gonna agree or one of them would come up with the value of the firm. Here's what the price of this firm is worth and we're gonna split it in half. And then the other would decide whether he was gonna buy or sell. And that worked out perfectly because that forced them both to be honest about their intentions. If I'm gonna value my own business, but I don't know whether I'm on the buying or selling end, then it's gonna be a pretty fair valuation.
So that's kind of a unique situation. It did work out really well for those two guys, but the whole point is they had that discussion well in advance of any actual settlement of this thing. For a lot of people, like you said, it's gonna involve bringing an attorney into the mix, bringing everyone to the table, and just talking about what is important to you. What do you wanna have as a memory of mom and dad? Do you want the business? Do you not want anything to do with it? Lay it all out. And then after everybody understands the different points of view, don't do anything. Exhale. Everybody go think about it, then come back to the table and see where we land.
Bob: Yeah. And even if we're not talking about ownership of a family business, just basic estate planning, you know, when you've got multiple kids or grandkids or what have you, as you've already mentioned, Brian, everybody's interest in, you know, their preferences can be different. And that's where you can get creative. It doesn't mean overcomplicate things, but we might have one kid in the family that's maybe not very responsible with money. And you don't wanna just dump a couple million dollars on them on one day when you pass away because they're not prepared to handle it.
And that's where you could put some contingencies into that trust to dole that money out over time. You can tie that with some incentives, you know, to hopefully motivate them to do some right things with that money rather than blow it. There's some creative things you can do with trust and estate planning, but you got to get out ahead of it, you know, proactively to make sure you don't leave a mess, you know, for those, you know, coming in the next generation.
Brian: Right. So you can do some mechanical things. You can use what's called a discretionary trust. That's the trustee. So the trustee decides on your behalf how and when children get access to the funds. That way they don't have a blank check. Well-drafted trust can protect assets from ex-spouses as well. And there's plenty of other toys you can play with there.
Bob: Here's the Allworth advice. You don't just pass on money. You pass on meaning. Protecting your legacy means protecting your family from the drama that unmanaged wealth can create. Coming up next, how to manage the risks of holding too much company stock. You're listening to "Simply Money," presented by Allworth Financial on 55 KRC, THE Talk Station.
You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. You have a financial question you'd like for us to answer. There's a red button you can click while you're listening to the show right there on the iHeart app. Simply record your question and it'll come straight to us. All right, you've worked hard. You've climbed the company ladder. Or maybe you've built the business from the ground up. But now you're sitting on a whole lot of one thing. Your company stock.
Brian: Yeah, company stock is not a bad thing at all, right? We should get paid, you know, we should be compensated when our company does well. The risk, however, though, and there's a lot of companies that put their customer or their employees in this situation is that now a lot of your financial stability is tied to it. Your salary comes from this company. If you've got your, you know, a large chunk or sometimes all of it. I still see that every now and then. Sometimes every nickel of it is in the employer stock. Then everything you have in this universe is tied to that company. And if it goes under, well, then that's gonna take everything with it.
We haven't heard a story like this in a very long time, but if the name Enron rings a bell, Enron was the Procter & Gamble of Houston, and was being the key word. It no longer exists and it basically evaporated overnight because it was all a house of cards. Lehman Brothers, slightly different story, but they made too many bets in too many bad places. These are companies that went poof overnight and they took obviously the market.
These things triggered market downturns, which dragged 401ks down just in general across the country. But if you had company stock in those firms and a large chunk of it, then you lost a heck of a lot more, you know, than a simple diversified portfolio would have lost in those downtimes. A hundred percent loss, of course, in the case of Enron. So these are things you wanna pay attention to. Make sure you know what position you're in.
Bob: Well, we don't have to see a company entirely implode like an Enron or Lehman Brothers. Those are pretty severe examples. You know, they're real, but they're extreme. I mean, just a big market decline or a change in a company's structure or earnings report, anything can cause a lot of unexpected volatility when you're overexposed to any one company.
So, Brian, let's talk about how people get stuck in this situation. Why do people find themselves? And let's face it, we're talking about well-educated, very intelligent people in most cases. Why did they get stuck in this position of being so highly concentrated in one position?
Brian: Yeah. So first, it starts off with a generous benefits package. So you're rewarded in this company's stock year after year. We're talking about restricted stock, stock options, employee stock purchase plans, things like that. You might even bought more on your own. And a lot of times they entice you with perhaps a 15% discount. So in other words, if the stock is worth 10 bucks a share on the market, you're able to buy it as an employee for $8.50, meaning there's an instant 15% gain. That's hard to resist.
And a lot of it comes from simply loyalty. I believe in this company. I'm familiar with it. I know it. I do this stuff every single day. I can do it in my sleep. So I understand it better than anything else that might be sitting inside a mutual fund. And then after some time, after you've been in this situation, eventually it becomes taxes, Bob. If I sell, I'll owe too much. Therefore, I'm never gonna sell. I just had this conversation with a client yesterday who has had stocks that he's owned for 40-some years and he doesn't have the capital gains. Let alone that he doesn't wanna pay it, he doesn't have the data to even know what the capital gain is.
So he's stuck in a situation where he says, "It's gonna cost so much to sell this. I'm just never gonna sell it." That's great. But as your advisor, I need to take it out of your financial plan. If you have walled it off because you don't wanna give a nickel to the IRS, then it is not an asset for you. So either need to solve that problem or find another way to work your financial plan around it. That tax can feel like a punishment. So people just hang on and hang on.
Bob: You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. Yeah. When people don't even understand what their tax exposure is, I think sometimes they underestimate what can be done with some proper planning. And, Brian, just within the last, I'll say 5 to 10 years, there's been a lot of really nice strategies come down the road to help people gradually get out of these concentrated stock positions with way less income tax exposure and capital gain exposure than they ever thought possible.
Brian: Yeah. There are vehicles out there such as exchange funds. An exchange fund is something where a lot of people who own diversified, or I'm sorry, the whole point is that they're not diversified, who own a single stock, own a big position in one thing. If I have 50 different people who have nothing to do with each other, who have too much in one stock, those 50 stocks probably make up a decent portfolio.
So there's something called an exchange fund where everybody can contribute their stock as is and receive, in exchange, a share of that whole pile of stocks. The point of that is you didn't sell it. The IRS does not recognize that as a sale. You exchanged it for a different pile of securities. So that is a way to diversify the risk without actually selling it. There's other things you can do as well. You can also do what's called a collar around a major position, which basically means you place option trades on the upside and the downside, and that will at least restrict the stock.
It can't go through the floor because you'd have an option in place to protect that. Also, won't grow to the sky. Should the thing 10x in the next couple of years, it's not gonna help you because you have something else on the top side. But when we've got this situation, the main thing we're trying to protect from is a massive loss from something unpredicted that can happen to any company out there.
Bob: Other things we talk to our clients about are more gradual selling strategies, and this is where we can dovetail a client's charitable intentions or goals with gradually diversifying out of these highly concentrated positions. Things like charitable remainder trust, donor advised funds, where you can give a chunk of this stock away, get all the tax benefits now, avoid the capital gains taxes, entirely avoid them, and dole that money out to charities over time.
In the case of a charitable remainder trust, you can retain an income stream from what you gave away if that's something you need to do. It can literally be a win-win for everybody except the IRS, and you don't need to dump everything overnight. And what this comes down to is a well-planned multi-year approach, especially in coordination with your income and your tax strategy, and that can really soften the tax hit while getting you out of this concentrated position that exposes your overall portfolio to too much volatility and risk.
Brian: Bob, I'm gonna take a step back even before that. Those are great entities that can be set up, but before you even do that, one simple thing you can do, if you regularly give money to some charity, a church or some other kind of charity or whatever out there, you can simply give them the stock. You don't have to write a check.
Bob: Yup. Absolutely.
Brian: Give them the shares of the stock directly. All you have to do is contact the development person, whoever handles that for that charity, and they know how this game works. They're gonna give you something called a DTC number and an account number, and they'll tell you where their investment account is held. You provide that to whatever firm is holding your shares and tell them, "I wanna send 100 shares of Procter & Gamble," for example. The IRS does not recognize that as a sale. You did not sell it. You simply gave it to a charity.
The charity, of course, is a 501C3, meaning it doesn't pay taxes. They sell it, and they will most likely do so instantly because they don't wanna speculate. They just need the cash. They sell it and do not incur any taxes. So you get the credit for having given them the same dollar amount that you give them every single year, but you don't have to pay any taxes for having liquidated it.
Bob: Great stuff, Brian. Here's the Allworth advice. Your company helped you build your wealth. Now your wealth has a new job, protecting your future. You're listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. Brian, I wanna take a few minutes to just really get on my high horse about what we talked about earlier in the show, and that's just the importance of having a truly coordinated financial plan and the value that a good fiduciary advisor can bring to the table in that area.
And I'm thinking of a meeting I had earlier this week with a new client that's coming on board or looking at hiring us. Brian, this was a two-hour meeting. At the beginning of the meeting, they shared a little bit of information and asked a lot of questions. The more I answered the questions, the more information was shared. As we went on, I found out just what we talked about. Stuff is in five or six different places with four or five different advisors, no coordinated strategy.
And I explained the fact that we don't have to take over management of everything in one day to add the value of a truly comprehensive financial investment and tax strategy, because you don't have that today. And the longer that meeting went on and the more comfort they had with that whole concept, which they had never experienced before, they were more and more open to sharing information. And I think it set the table for a good relationship going forward where we can really add the value to their situation that, Brian, honestly, I think they've been looking for 20 plus years and have never found. I'm sure you've had similar meetings.
Brian: Yeah. And I'm thinking back over my past. When I first got started, everything was product-based. It was everybody knew a guy who had a hot stock tip from last month or the Janus mutual fund or the AIM Weingarten fund or whatever. Something out there that was just the coolest thing ever. It was all we are gonna need to own for this. It was all product-based and it would change every year too. And that's nothing to build a career on, let alone a fiduciary relationship.
So eventually, it pivoted to what am I gonna do with all this? How does it all fit together? And I think nowadays, when we talk to new clients or prospective clients, the very first thing they say is, "Well, all we really talk about with my advisors is what the market did last quarter and what we think it might do this quarter, which nobody knows anyway. And I don't really get the point of this anymore. How are these people helping me? I'm in a different situation now. I got a lot of moving parts to my situation. I'm about to retire. I've got social security decisions to make. I got a pension, maybe a business to sell. How does all this coordinate together? How do I get the conversation off of just what is this pile of money doing? There's so many more moving parts nowadays.
Bob: Yeah, you repeated that key word, coordination. Coordination. And that's really the value-add that comes from having a good, qualified fiduciary financial advisor on your team.
Thank you for listening. You've been listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.