The individuals and scenarios described in this article are hypothetical and are provided for illustrative purposes only. They do not represent actual clients or actual investment outcomes.
Some of the largest portfolio risks aren't created by bad investments. They're created by good ones. Over the last decade, many executives have accumulated substantial wealth through equity compensation programs. Restricted Stock Units (RSUs), stock options, and Employee Stock Purchase Plans (ESPPs) have transformed what began as compensation into meaningful family wealth. For employees of companies that have experienced significant appreciation, those positions often become one of the largest assets on the balance sheet.
Success, however, can create its own challenges.
What begins as a thoughtful participation in a company's equity program can gradually evolve into a level of concentration that was never intentionally planned. A position representing 5% of a portfolio becomes 10%. Ten becomes 20. Before long, a family may discover that a significant portion of its net worth, future retirement security, and estate planning strategy depends upon the continued success of a single company.
This dynamic is particularly common among senior executives. Compensation often extends beyond salary and bonus into multiple forms of equity-based awards. Future vesting schedules add to existing holdings. Deferred compensation may be linked to company performance. In many cases, an executive's employment income and investment portfolio become increasingly tied to the same economic outcome.
The issue is not whether the company is well-managed or whether the stock remains attractive. The issue is that concentration risk introduces a level of dependency that can alter the trajectory of an otherwise well-constructed financial plan.
Julie recently found herself confronting this reality. Over a successful career, she accumulated company stock through RSUs, stock option exercises, and an ESPP. The position had performed exceptionally well. The challenge was that the stock now represented more than half of her investable assets, while her compensation continued to be tied to the same company.
Situations like Julie's have become increasingly common, particularly among technology, healthcare, and financial services executives. While the underlying companies may differ, the planning challenge is often the same: how to diversify without unnecessarily disrupting a tax-efficient strategy.
Historically, the solution was straightforward. Investors sold shares, paid the associated taxes, and reinvested proceeds into a diversified portfolio. While that approach remains appropriate in many circumstances, today's marketplace offers additional tools that may provide greater flexibility for investors with highly appreciated positions.
One area receiving increased attention is direct indexing. Unlike a traditional index fund, direct indexing involves owning many of the individual securities that comprise an index. This structure may create opportunities for ongoing tax-loss harvesting while maintaining broad market exposure. For investors gradually reducing concentrated stock positions, those harvested losses can potentially offset a portion of realized gains over time. The objective is not tax elimination, but rather thoughtful tax management as diversification occurs.
More recently, some affluent investors have explored long/short direct indexing strategies. These approaches seek to create additional tax-management opportunities through a combination of long and short exposures while maintaining alignment with broader investment objectives. Although not appropriate for every investor, they have become increasingly relevant in conversations involving concentrated positions and significant embedded gains.
Exchange funds have also resurfaced as a topic of interest. These vehicles allow investors to contribute appreciated stock to a pooled structure alongside other concentrated shareholders. In return, participants gain exposure to a diversified basket of securities while potentially deferring immediate capital gain recognition. Exchange funds can be attractive in certain circumstances, although their liquidity restrictions, holding requirements, and eligibility standards often limit their applicability.
For families with charitable intent, appreciated stock may present another planning opportunity. Rather than contributing cash, highly appreciated securities can be donated to a Donor-Advised Fund (DAF). This approach may allow investors to diversify a portion of a concentrated position while simultaneously advancing philanthropic objectives. For many affluent families, charitable planning serves as an effective complement to broader diversification efforts.
The planning considerations become even more nuanced when concentration exists outside of public markets. Blake, a successful entrepreneur, faces a different version of the same challenge. Most of his net worth remains tied to his business. While business owners rarely have the same liquidity options available to public-company executives, the underlying principle remains unchanged. Significant wealth concentrated in a single asset often warrants a thoughtful strategy for gradually creating diversification elsewhere on the balance sheet.
Concentration risk ultimately extends beyond investments. It influences taxes, retirement planning, estate planning, charitable giving, and family legacy decisions. The conversation is rarely about whether a stock should be sold. More often, it is about determining how a concentrated position fits within a family's broader financial picture and identifying the most efficient path forward.
The irony is that many concentrated positions exist because they worked so well. The stock performed. The company succeeded. Wealth was created. Yet some of the most effective long-term planning occurs when investors recognize that building wealth and preserving wealth are often two different disciplines.
A concentrated position may have created financial success. A diversified strategy may help support what comes next.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon.
These examples are for illustrative purposes only and do not represent actual client experiences. Individual results will vary based on personal financial circumstances and tax laws.
Stu Caplan is Senior Wealth Strategist at Members’ Wealth, a boutique wealth management firm that offers a comprehensive approach to serving individuals, families, business owners, and institutions.
The firm’s goal is to preserve and grow its clients’ wealth to endure over time, while thoughtfully evolving its strategy to suit an ever-changing world. With over 20 years of industry experience, Stu and the Members' Wealth team thrive on bringing clarity and confidence to clients' unique situations.
Stu received his MBA from The Robert H. Smith School of Business at the University of Maryland and his bachelor’s degree from the Eller College of Management at the University of Arizona. Stu resides in Bucks County, PA with his wife and two sons. He’s an avid golfer and is thrilled that his boys have embraced the game. He also volunteers his time as a board member of the PKD Foundation and Abrams Hebrew Academy.
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The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon.
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