Financial Planning - - CLIENT -

Re­duc­ing the risk in a client’s con­cen­trated port­fo­lio can go beyond sell­ing shares or do­nat­ing them to char­ity. In se­lected sit­u­a­tions, other meth­ods may be use­ful: Ex­change funds. The client con­trib­utes shares from the con­cen­trated po­si­tion in re­turn for a por­tion of a di­ver­si­fied stock port­fo­lio. “We have rec­om­mended ex­change funds in cases when a client didn’t have a char­i­ta­ble in­tent, wanted to di­ver­sify, but didn’t want to in­cur taxes now,” says Adam Fuller of Hom­rich Berg in At­lanta. “Af­ter be­ing in the fund for seven years, this client re­ceives a pro­por­tional dis­tri­bu­tion of the stocks in the fund.”

The key is how well the shares in the fund per­form. “Stocks that sounded good seven years ago, when the ex­change fund was built, might not be so good to­day,” Fuller says.

Pro­tec­tive op­tion col­lars. The client pur­chases a put op­tion on the stock in the con­cen­trated po­si­tion, lim­it­ing the down­side risk, and sells a call op­tion to help fund the hedge. “This strat­egy is gen­er­ally more ef­fec­tive for shorter pe­ri­ods of time,” says Lu­cas Bucl at KHC Wealth Man­age­ment in Over­land Park, Kansas, “rather than a per­ma­nent risk man­age­ment strat­egy.”

Pre­paid vari­able share for­wards. The client en­ters into a con­tract to sell a vari­able num­ber of shares in the fu­ture in ex­change for cash now, typ­i­cally 70% to 90% of the cur­rent value. “This di­ver­si­fi­ca­tion strat­egy de­fers taxes and es­tab­lishes a floor (and ceil­ing) on the stock price,” Fuller says. “We have not had a client es­tab­lish a vari­able for­ward in a num­ber of years due to the high cost and un­cer­tainty over tax reg­u­la­tions.” The in­vest­ment min­i­mums for such strate­gies may be $500,000 and up, Fuller says.

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