Wall Street can’t agree whether the high-flying technology sector, which propelled the S&P 500 in the first half of 2018, has staying power or is due for a correction. But diversification is top of mind for RIAs that advise technology professionals who hold big positions in tech stocks.
“Clients should always be cognizant of concentration risk, regardless of the market cycle,” said Evan Schmidt, a financial advisor at Schmidt Financial Group in Kirkland, Wash. The majority of the RIA firm’s 200 client families hale from Amazon, Microsoft, Facebook, Snap, Uber Technologies, Lyft, Dropbox and other tech companies.
“We don’t have one solution that we shoehorn all our clients into,” said Schmidt. “There’s a big difference between young and older investors, and someone who works for a unicorn or a blue-chip company.”
Last year, his firm helped young employees at Snap (whose shares surged right after its IPO and then plummeted) harvest their losses and move into the S&P 500 index for greater diversification and better returns. But conversations with employees at Facebook, a heavyweight in the S&P 500, are more likely to cover how much exposure they should have to private equity and international stocks, he said.
When helping diversify clients’ portfolios, Schmidt Financial Group also considers risk appetites, taxation and other factors. “Everyone is running for the IPO gates right now,” said Schmidt, but he and his colleagues look holistically at clients’ holdings and build portfolios around their tech equity positions.
According to Schmidt, clients have more of an emotional attachment to stocks that haven’t yet gone public, and this uncertainty can create more friction in the planning process. So his firm quantifies for clients what would happen if an IPO goes better than, worse than or as expected, he said, and it shows them how the different scenarios would impact their goals. “We connect the dots,” he said.
Technology is always a significant portion of his clients’ net worth, said Schmidt, but it tends to drop as people age and accumulate net worth beyond the stock awards received from their employers. Schmidt Financial Group’s earliest clients, “all Microsofties who came to us young and retired young,” he said, have long diversified and they’ve developed portfolios that support their lifestyles and planning needs.
Michelle Rand, a CFA and the president of Cascade Investment Advisors, a value-oriented RIA firm in Oregon City, Ore., makes sure clients who are or were in the tech industry aren’t overexposed to technology stocks. She and her colleagues educate them about the need to diversify and set expectations at the outset on how it will occur.
“That helps prevent balking, though that does happen anyway,” she said. “It’s just easier to deal with when you have the client’s signature on a document that says you are going to do this or that every year.”
The investment policy statement for one client who retired from a large tech company calls for 10 percent of his tech holdings to be sold each year. To determine this figure, Cascade Investment Advisors considered the client’s cash-flow needs (the proceeds are being reinvested for cash flow) and his tolerance for taxable gains each year. The client and his wife need cash flow for a home remodel and other things, said Rand.