Common Questions from a Client

The Impacts of Working with a Financial Advisor

I recently had a conversation with a successful professional in his mid-30s, who had built a solid portfolio of high-growth stocks over the past decade. After enjoying significant returns, he sought a second opinion on his holdings to ensure he was making the right decisions for his future.

Like many investors at this stage, he had some key questions on his mind:

• What should I do with my highly appreciated stock?

• Do I have enough saved for my kids’ college?

• Am I managing my brokerage accounts efficiently?

These are the kinds of questions that many clients face, regardless of their financial background. While each person’s situation is unique, the strategies we discussed can be valuable for anyone looking to maximize their financial strategy with the help of a trusted advisor.

If you’re asking similar questions, it might be time to take a closer look at your own investment strategy. In this post, I’ll dive into these concerns and offer insights that could help you make more informed decisions.

What to do when Risky Stocks Go Up?

An experience many $PLTR investors shared together recently, including my client. His portfolio was primarily in a taxable account and was also split among 30 unique trending stocks. He has historically sold off and rotated various positions but several positions such as $HD, $NET, $AZO, and $CRWD, had all been held long term, some as many as ten years. A 3 Yr back-test across his holdings also revealed a draw down by some as high as -73% in a given year. When compared to the S&P 500 as a benchmark, and a balanced portfolio of Index ETFs, the experience would have been different for a majority of the time spent invested.

Stressed out, he wanted to divest some holdings into ETFs and lower his risk. So how did I categorize his requirements for managing his highly appreciating stock?

• Reduce his risk

• Diversify among less volatile investments

• Limit taxable consequence

Reduce Your Risk

Many investors might speculate to either hold or sell; however, I would always argue to manage your risk appropriately. I also like to say, that if you appreciate the stock, use their products, think it will continue to have a long term impact, then don't sell out of it entirely. An early tactic an older Financial Advisor showed me was to Capture Gains and Keep Exposure. The benefit was you sell some shares now and lock in your gains but you keep your original investment amount. My client was emotionally attached to some of his assets and wasn't ready to part with all of them, so this appealed to my client. This still reduces my client's portfolio risk but maintains the same holdings. Incurring a tax for the capital gains is inevitable, so we controlled what we could. We calculated the maximum he wanted to pay in taxes, which was about $20,000. Luckily, we managed to take advantage of another strategy to reduce our tax bill, explained later.

Diversify Among Less Volatile Investments

With some of his holdings reduced, and liquidated to cash, it was ready to reinvest into a more stable investment such as an ETF. A combination of different sector and market cap ETF's and another smaller pocket of funds invested in Gold ($GLD) and Ultrashort Bonds ($BIL). Rather conservative, one might think, but the optimized combination of growth and stable investments was perfect because it was funded with some highly appreciated $PLTR stock, which several days later plummeted from its high to a maximum of -21.56%. He might have chosen to liquidate then, or maybe later if it came back, but he didn't like the stress of watching it occur. We were lucky to have moved out before then. My client also go to enjoy watching his balance move minimally, a stark difference from the wild swings he would witness on a daily basis.

Limit Taxable Consequences

Utilize Tax Loss Harvesting

As a financial advisor, its important to present multiple options and sometimes it takes a combination of them to maximize his goals. The option to use Tax-Loss Harvesting helped my client save an estimated $12,000 in taxes, and move a mix of his highly appreciated stock with other positions that failed to perform. His investment in $LMND, no longer appreciated and having underperformed for several years was one example of a failed investment he wanted to remove. By netting out any taxable gains with losses, his tax-bill would be less severe.

Contribute the Stock to an UTMA

The decision to pare down was my client's and the second option presented to him was a great way of pivoting the conversation to his next issue on college savings plans. Saving for college is a great way to minimize taxes but its also a useful method in estate planning. Let me elaborate as I did to my client. Gifting stock is great when donating to charity, but its not so great when gifting to family. The reason why is because when you do, the cost-basis goes with it which means whoever you gift it to still has to pay a really high tax on the capital gains; however, the kiddie tax can be avoided in an UTMA account for the first tier of taxes which is $2,600 for 2024, (https://www.irs.gov/taxtopics/tc553). While this provides a disadvantage for the student later when applying for student aid, my client has full intentions on covering the full cost of college by saving early, thus gifting the highly appreciated stock and paring it down over time in a lower-tax bracket was a solution my client was interested in using.

Do I have enough saved for my kids college?

Although my client's plans for his new UTMA were efficient, it wasn't enough to save for college, and his goal was to pay it outright. So the UTMA became a supplement, partly because it wasn't the most efficient savings vehicle compared to a Section 529 plan. Having excess cash from the proceeds of the tax-loss harvesting strategy, the client decided to lump sum invest it into a 529 Plan, but how much should he contribute?

My client estimates his son will attend a public state university in Texas, starting in 16 years. His ideal preference is for his son to attend his Ala Mater school, Texas Tech. We looked online together at the current price of admissions and compared with state data for education inflation. According to Texas Tech (https://www.depts.ttu.edu/financialaid/costToAttend.php), the current annual expenses qualified for 529 tax-treatment appeared to be $20,000. Using a 4.5% inflation rate for Texas Tech qualified expenses (~$20,000), I calculated college to cost $40,447 annually by the time his son attended college (16 years). If we use a real return of 2.5% (This is return net inflation) during college, it means a lump sum at the start of college in the amount of $155,964 was required. My client believes a 10% annualized return is sufficient, which means he could put away a $34,000 contribution, and without any further contributions, it would hit his required college savings amount. If he decided to make additional payments, suppose with more highly appreciated stock being gifted to the UTMA, he could continue to pare down his current tax liability, and remove future investment tax liabilities for qualified education expenses. My client now has a high probability of achieving their goal of covering his kid's full college expense.

Do I have too many brokerage accounts?

Another question posed by my client earlier. His primary investment portfolio resides at Schwab and his employer plan at Fidelity. My client also has a Robin Hood account with about $38,000, and a SoFi account with about $115,000. So does my client have too many Brokerage Accounts?

The answer - No - There was not a single indication he is unhappy with it. He asked me if it was normal to have assets spread out like this and if other clients do this too. Its a normal question to ask. He likes his Charles Schwab account the most. SoFi was an emotionally driven decision, curious by the platform and incentivized by the cash offers provided for opening an account and maintaining a balance. Robin Hood for a similar expression, driven by the curiosity of options trading, my client likes their UI and has no interest in getting rid of it.

As an Advisor, we have software to help lock in client assets to single view, and incorporate them into a financial plan. It makes no difference to me where my client wants to position his holdings, as long as he is doing well with his financial goals.

How much better off was my client?

Beyond the financial impacts my client received piece of mind. His probability of success was enhanced and we ended our appointment feeling more optimistic for the future. He gets to spend less time thinking about it while I bear the responsibility of monitoring his success and updating him to recommended changes. Only time will tell, but its a risk we are both committed to make.

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