Many affluent families have built significant wealth through a single stock, whether from founding a business, equity compensation or decades of holding a successful investment. But turning that concentrated position into a more diversified portfolio can create a difficult balancing act for advisors, who must manage investment risk without triggering unnecessary tax consequences.
To explore how advisors can guide clients with concentrated stock positions, we spoke with Neale Ellis, Founding Partner and Co-Chief Investment Officer at Fidelis Capital; Brooks Schaffer, Founder and Managing Partner at Waypoint West; and David Ellis, Partner and Director of Investments at EverPar Advisors.
We asked each of them: With so many families holding wealth in a single stock, how can advisors approach diversifying a concentrated position while limiting the tax consequences?
Their responses follow.
Neale Ellis, Founding Partner And Co-Chief Investment Officer, Fidelis Capital
At its core, the concentrated stock issue is primarily a risk mitigation strategy. A holistic approach combines investment management, tax planning and estate planning.
Before thinking about the solution, it’s important to understand the clients’ goals, timeline and end-state view, as well as considerations around control status and constraints of the security, to be as effective/efficient as possible.
Many strategies that try to allow for diversification with tax efficiency involve hedging, and utilization is very dependent on the specific security and circumstances. There’s a big difference between small- and large-cap concentrated positions.
Regardless of strategy or instrument, everything should be examined through a structural and estate planning lens. Appropriate structuring of assets and ownership can meaningfully improve the long-term outcome for the family and future generations in terms of total net worth, tax efficiency and risk reduction.
Brooks Schaffer, Founder And Managing Partner, Waypoint West
While concentration is the fastest way to build wealth, it’s also the fastest way to lose it. Families who have held one stock for decades typically didn’t choose concentration. Time and compounding did it for them.
That’s what makes these different from IPO positions. Basis is near zero, the holder is often older, and the stock carries family identity. Start with an honest re-underwrite of the family’s ability to take this risk against long-term goals. Would you allocate to this position today if you were building the portfolio from scratch?
Then sequence by tax efficiency. Where a step-up in basis is in view, hedging buys time, though watch the constructive sale rules. Annual gifting moves shares to family members in lower brackets. Exchange funds offer diversification with deferral. A multi-year sale calendar, paired with loss harvesting from a direct-indexed completion portfolio, absorbs gains gradually.
David Ellis, Partner And Director Of Investments, EverPar Advisors
Concentrated legacy positions are harder than IPO wealth: near-zero basis, decades of attachment and sometimes a stock that has underperformed. The mistake is treating it as one decision: either to sell and pay taxes or to hold and hope.
We start with charitable intent because appreciated stock is the best asset a family can give. A donor-advised fund bundles years of giving into one contribution: a fair-market-value deduction, no capital gain and an immediately smaller position. At a larger scale, a charitable remainder trust converts the stock into a lifetime income stream, spreading the gain rather than paying it up front.
Direct indexing helps to fund the rest. Owning individual names rather than a fund produces harvested losses; those losses become the currency we spend selling down the position.
Then it’s an annual gain budget, executed on schedule rather than in one taxable event.
Jeff Berman, Contributing Editor and Reporter at Wealth Solutions Report, can be reached at jeff.berman@wealthsolutionsreport.com.
