What do you do if a client puts almost their entire net worth in one stock? Today Matt and Micah answer a question from an advisor who is dealing with this very situation. Listen in as the guys discuss the importance of how you set expectations with your clients and what you need to do in order to navigate more complex situations.
You’ll hear Matt and Micah put things in perspective by looking at the client’s specific circumstances and determining the dependence and cash flow factors that are at play when someone owns a lot of one stock. They also share new insight on some really great option strategies and tactics to help you stick to your guns while ensuring your clients receive massive value from you and benefit from their portfolio.
Listen to the Full Episode:
What You’ll Learn In Today’s Episode:
- The importance of recognizing your deal breakers and setting expectations on day 1.
- Examples of deal breakers when working with clients.
- The difference between greed and a solid investment plan.
- The important things you need to know that might dictate how much they can have in stock.
- What catastrophic risk is and how to avoid it.
- The importance of empathizing with the client’s situation.
- How to walk a client through making the best decisions for them.
- The right questions to ask when evaluating a client’s concentrated stock.
Ideas Worth Sharing:In this business, if you're good, you’re right 6 out of 10 times. You’re never going to be right 9 out of 10. – Peter Lynch Click To Tweet A client who has 100% in one stock – I don’t care what that stock is – that’s a financially catastrophic risk. You’re betting everything, your entire family’s future, on one position. - @ThePerfectRIA Click To Tweet When do people sell at the bottom? When it’s fear. When do people buy at the top? When it’s greed. - @ThePerfectRIA Click To Tweet
Resources In Today’s Episode:
- Matt Jarvis: Website | LinkedIn
- Micah Shilanski: Website | LinkedIn | Twitter
- Email Matt and Micah
- The Backstage Pass
- The Perfect RIA LinkedIn Page
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Read the Transcript Below:
Matthew Jarvis: Hello, everyone. Welcome to another episode of the Perfect RIA podcast. I am your co-host and co-founder of the Perfect RIA, Matthew Jarvis. And with me, the man, the myth, the legend Micah Shilanski. Micah, how are you, my friend?
Micah Shilanski: Jarvis, it’s another day in paradise. Everything’s going pretty well. We’ve got some exciting things to talk about today.
Matthew Jarvis: We do. In fact, first and foremost, I have to let the nation know that Micah gave me a very generous birthday gift. And you can’t see it because this is a podcast, not a video. But it is a coffee mug that appears to be all black but when you fill it up with coffee, it says, “The man, the myth, the legend, my idol, Micah Shilanski.” And there’s a picture of Micah on the other side. I think my team was one half impressed and one half disturbed. They’re like, “Really? Micah sent you this? I think he takes himself too seriously.”
Micah Shilanski: I was dying when we were thinking about this.
Matthew Jarvis: So great.
Micah Shilanski: And I really wanted to get like the perfect RIA cup first. And then when we filled it up and it all changed in there. So you have even a better setup, but we missed on that one, but—
Matthew Jarvis: We’ll put it with the show notes. I got a picture. And I think everybody will like it. It’s really funny.
Micah Shilanski: Yeah. What better way to start your day? Positive visualizations. So Jarvis fools himself on our own podcast in third person, and I send out a mugs with my picture on it. There you go. Vanity amuck. What can I say?
Matthew Jarvis: I think it’s great. I think it’s great. Well, Micah, I’m really excited for our topic today. This comes from one of our great members of the backstage pass, which is a very large group. We’ve got a real powerful group of backstage pass members. And one of the advisors posted on our forum, which has been a lot of fun. He says, “Matt, Micah, I’ve got this situation with a client. A client has five million dollars of Amazon stock, and it’s essentially their entire net worth. So two million is in their IRA. Three million is non-qualified. They live in a high tax state. They’re thinking about moving to a low tax state. And the client’s used to getting 30% a year returns. How can I possibly tell them to sell, getting killed in taxes, and then go to a diversified portfolio that might do 10% a year?”
Micah Shilanski: Might, right? You better tell him that it’s a 7% a year. No, this is such a great question. And I think this is going to be a little bit soap boxy. So hopefully you appreciate the soap box. We’re going to have some good technical ideas for you to be thinking about like option strategies. There’s some really cool things to be thinking about, which would help decrease the amount of risks that they’re taking. But they get complex. So we’re going to talk about that. But number one, I think even before you get into this conversation, you have to be mentally set for what are your deal breakers, right?
Matthew Jarvis: Yes.
Micah Shilanski: What are things that are out there? And this is setting expectations with client. And you need to set them day one when they’re coming in onboarding as a client. I don’t necessarily set them at a prospect meeting because it’s a prospect meeting. But as soon as they onboard a client, you’re setting these expectations. If you haven’t done so, you need to go out to your clients and do it. And an example of this is a deal breaker. I’m not going to help you engage in anything which is going to jeopardize your financial future, right?
Matthew Jarvis: Yep.
Micah Shilanski: So if you’re going to do something that jeopardizes your financial future, I’m out. Now, does this mean if a client wants to have $50,000 in a separate account and they want to make it their play account, they want to buy and sell their own stocks or do whatever want, or they want to keep 50,000 with Amazon, we’ll say, “Great. That dollar amount, 50,000, 500,000, whatever it is, if it goes to zero, does it jeopardize your financial future?” If the answer is no, knock yourself out. Go for it. Absolutely. But once the answer becomes, yes, we have to make a change. We cannot do that. And that is an absolute deal breaker.
Matthew Jarvis: Yep. Yeah. I’m a hundred percent on board there. I word it slightly differently. And again, Micah, you and I articulate things differently. I explained to clients and prospects, I say, “Hey, we cannot take any potentially catastrophic risks in retirement.” And sometimes I’ll use a bit of a hyperbole there. I’ll say, “Hey, we don’t need to have a $5 deductible on your car insurance, because $5 is not a financially catastrophic risk. We do need to have your home insured because of your home burnt to the ground and you needed to build a new one that’s probably more than you could cover. We do need to have umbrella liability coverage.” And this goes to this example of a client that has 100% of their investment in one stock. And I don’t care what the stock is. That’s a financial catastrophic risk. You’re betting everything, your entire family’s future on one position. And yet it’s worked out really well. And it may in fact work really well for the next decade or maybe even a hundred years. Who knows how long Amazon’s going to continue like this? But it’s too big of a risk, absolute deal breaker.
Micah Shilanski: It is. And it’s a really tough one that’s going to be there. I have graduated a client because of this. So somewhat similar, in her particular case inside of her employer account, she had private company stock. And that would gain 15-20% a year very, very consistently. And it was outperforming virtually everything else. And I couldn’t get her to the point to realize that enough was enough. So basically what happened is she got greedy. This is what happens, just to be clear. So that investment cycle that we all know. When did people sell at the bottom? When it’s fear. When do people buy on the top? When it’s greedy. When you’re looking at this and saying, “Man, I could just get in with a holder for one more year. It’s another 30%, one more year. It’s another 20%.” That’s greed. That is not a solid investment plan to invest. While you could be correct, is it worth the risk? This becomes the bigger question.
And you really need to pivot that conversation back to lifestyle. Because there’s so many things in this particular case we don’t know, like how much cashflow does the client need in retirement? What are their goals? What are things they want to do? How much income do we need out of that five million dollar net stake that they have in order to satisfy their lifestyle? Because that could dictate how much Apple stock. If they only need $5,000 a month, you know what, they can own a lot of Apple stock if all they need to own is $5,000 a month in income. If they need $25,000 a month in income, we’re going to need to sell a whole bunch of that Apple stock to do that. So this is a whole depends question. But we really need to rearticulate this back to the client is a cash flow question.
Matthew Jarvis: Micah, I really liked that because there’s this kind of gut reaction as an advisor saying, “Wow, this is a catastrophically bad idea. I better pounce all over this idea.” And really your approach was more, let me get a feel for the situation. Perhaps this client has three SPIAs that are covering all of his income needs. He has no children, no descendants. And he’s just hoping to ride Amazon like a rocket ship. In which case, all right, not what I would do but your situation works. But then that approach of being open to it puts you on the same side of the table as the client, not their parent that’s telling them their head they’ve had too much sugar.
Micah Shilanski: Amen.
Matthew Jarvis: The other thing we have to do is really empathize with the client situation. This is not a logical move that they’ve made. It’s an emotional move. But it’s a powerful, emotional move. If this guy has got three million dollars of non-qualified Amazon stock, he’s probably got $2.5 million of unrealized gains. So he’s facing five $700,000 of income taxes to divest his position plus the state that he’s in. Let’s call it maybe eight $900,000 of taxes.
Micah Shilanski: I would probably say 900, just on the high side.
Matthew Jarvis: So 900,000, it’s done nothing but make money for decades. That’s a tough emotional one to let go of. And we need to be empathetic to that.
Micah Shilanski: Yeah. Yeah. So framing the conversation right is super important so we can make sure we’re addressing it correctly. And also Jarvis, as we’re talking about that framing conversation … And we talked about this before in one of the mini pods, Tips From the Trenches. When you make an assumption with the client, I love that analogy right now, you’re becoming the parents telling them they can’t have sugar versus having an open conversation because you may not know all of the facts about this. Let’s learn more about it as you’re going through. And this prevents you from being wrong. If we’re in a guided discovery and we’re talking about things and we’re flexible with it, now this gives a lot more leeway because I really don’t like to be wrong. Granted, it’s an ego thing. I’m not going to lie about it. But how do we stage this up where we can support the client the best way. And I think that guided discovery would help a lot in this.
Matthew Jarvis: That’s true. And really to paint their options … And this might be an ego thing as well. I don’t like being told what to do. So when I go to the physical therapist and they say, “Hey, Matt, you sprained your calf muscle, hypothetically speaking, you should really stay off of it.” Or if they just say, “Hey, you have to stay off of it.” I’m going to tell them to. But they say, “Hey, listen, you could go ahead and keep working out on it. You’ll probably going to damage it worse and cause permanent injury. Your decision.” Okay, well now I get to decide, but it’s my decision. Someone hasn’t told me what to do. And somebody who’s got five million dollars of stock, they’ve beat the system. They didn’t just follow the status quo. This isn’t somebody who’s used to being a cog in the wheel. They’re used to doing things their own way. And again, you need to be empathetic of that.
Micah Shilanski: Yeah. So knowing when enough is enough. What are your deal breakers? Setting expectations with your clients. Knowing when enough is enough is really, really important. And let’s not forget about a giant benefit that’s out there that I think so many advisors forget about, capital gains harvesting. Now, this particular client they’re thinking about changing states from a high-income state to a low-income state. So maybe we’re going to defer things to those people that discussion for right now. Capital gains harvesting can be a wonderful thing based on their income to every year he’s selling a little bit of stock or doing something to keep those gains, reinvest with now a higher basis going forward versus keeping a large concentrated position. And I could argue if we did this wisely with a client, even with their same Amazon stock throughout the years, they wouldn’t be sitting at a $900,000 tax bill because we aggressively took bits out at one piece at a time. So you’re not saving taxes today. You’re saving taxes with the longterm with capital gains harvesting.
Matthew Jarvis: Especially when we’re in a historically low tax rates and historically high spending. So this isn’t a political discussion. We can have those on another podcast. But I tell clients this all the time. I say, “Hey, tax rates are as low as they’ve been since the tax code’s been created. And both political parties are spending like there’s no tomorrow. At some time that’s going to have to arbitrage. That’s going to have to come together. And we should probably take advantage of the low rates now.” So Micah, how would you tackle this? This guy comes in. You’ve got it. You’ve gone through some stuff. Let’s say that he needs at least at this five million dollars at least three of it needs to go into a buckets or guardrails approach to generate his income. How do you tackle this?
Micah Shilanski: So number one is the emotional guided discovery conversation, getting us at the same page and letting us know what the real milepost is. And the milepost is cashflow. It’s not assets.
Matthew Jarvis: Yes, 100%.
Micah Shilanski: So we have to make that transition number one. After we make that transition, then we kind of look at it and say, “Great, what’s the best way that we can do this so your assets are still going to grow and you’re not getting killed in taxes?” Okay, number one is two million out of the five in an IRA. This is an easy money move. We can move that two million in an IRA. We can put it in our bucket strategy across the board. No negative tax implication whatsoever. Agreed?
Matthew Jarvis: Yep. Now, Micah, do you have a client push back on that and say, “Micah, just put my Amazon stock in your buckets.” How do you handle that?
Micah Shilanski: I don’t because by the time I’ve explained how the buckets work, it’s transparent that the Amazon stock won’t work. Now, the Amazon stock could work for a portion of the buckets. So it’s not going to work for the cash bucket. It’s not going to work for the income bucket. And I don’t need to explain that because clients see exactly what those buckets are. Now, it may work for a portion of that third bucket or growth bucket. And so my answer is going to be absolutely. Let’s use some of your Amazon stock for that last bucket. But we need to use it in proportion. That doesn’t mean we put all the five million dollars in our growth bucket, because now we don’t have buckets. We have one pot, and that’s not our bucket strategy.
So what we need to do is, first, we need to fill our cash bucket. So great. Where’s the best place we should do that from? Then we’ll talk about the outcomes. Again, I don’t want to be dictating what needs happen. These are what you can do. This is what I’m going to recommend. And we’re probably going to be like, “All right, let’s sell a portion of the Amazon stock.” I’m never going to ask to sell the whole thing. There’s a lot of emotional tying to this. I will throw that as an option. Look, some people may say sell a hundred percent. I’m not going to. Now, we’ve just walked them off emotionally off the edge. When you talk about selling a hundred percent, they can get emotionally wrapped up. I’m not going to tell you to do that. Great. Now they’re coming back down. So now we have dispelled a concern that we know they have.
Matthew Jarvis: I really liked that. And I just want to highlight two things there. One, you went ahead and threw out there the elephant in the room. Because they’ve probably been told by anybody they mentioned, “My goodness. You’re a hundred percent. You’ve got to sell.” Every other financial advisor they talk to has been, “Oh, you got to sell.” So you’ve just said, “Hey, some people will tell you this. I’m not going to tell you this.” Great you’ve taken. They might’ve been waiting for that bomb to drop.
The other is, and I really want to highlight this bit of extreme ownership, which is if the client or prospect is still pushing back on the strategy, I need to own that I didn’t go through in the right order. If I led with you need to sell some of your Amazon stock and they pushed back, my default reaction might be, “Well, they just don’t get it.” But the powerful one is say, “All right, I did not articulate. I should have started with the cash bucket.” Micah, you begin to think, “Hey, we need this much in cash to cover your income needs. From where do you think we should get that cash?” Well, there’s only really one answer to that, but let them give the answer.
Micah Shilanski: Absolutely. Right. And as you walk a client through that, it’s aspects in sales … and again, sales can be used for whatever purposes that are out there. Now this is for the good of the client that’s there. In our guided discovery when we started that 30,000 foot view, we walk our way down. And we always do check ins with the client and make sure we’re on the same page. Because if I explain the buckets and it doesn’t make sense, why am I getting into asset allocation? Right?
Matthew Jarvis: Yeah, yeah.
Micah Shilanski: It’s, “Nope, Nope. Go back to the buckets. We missed a concept.” You might’ve correctly articulated the buckets where the client can understand it. They’ve now agreed. They want to do the bucket strategy. If they didn’t agree to the bucket strategy, we’re not moving past the buckets. They’ve agreed to do the buckets in your case. They agreed to use the guard rails. Awesome. This is the next step in it. Would you like to do that? Okay, great. This is how we’re going to do it. And we’re walking them through that. And then I’m also they’re going to be really sensitive to the Amazon stock. And we’re not recommending Amazon. It’s just in our example.
But we’re going to be pretty sensitive to that because we know there’s a lot of emotions wrapped up about it and ask them about saying, “Okay, if we reposition some of this into the cash bucket, is that going to be okay?” And that’s probably how I’m going to say it. And then they’re going to say yes. And I’m going to be a little bit more clear, “Jarvis, just so you know, that means we’re going to sell $300,000 of your Amazon stock. And I’m going to put it in this cash bucket. You’re okay with that? Okay, great.”
Matthew Jarvis: I love it. Yep.
Micah Shilanski: And then we’re going to the same thing with the income bucket. And I’m going to work them one step at a time to divesting that Amazon stock. But then we’re going to go to the growth bucket and say, “Jarvis, good news. Your Amazon stock fits in the growth bucket. It’s just a little too much of the growth bucket.” We’re all going to laugh a little at that. And we’re going to see so what we want to do is that don’t want to dump all of that stock at once. We’ve already talked probably a little bit of taxes about tax buckets. Now we’re going to be jumping over and really going through and talking about … We talked about the tax buckets. Now we’re going to be moving over and talking about how this needs to be set up from the allocation perspective that’s going to be there.
So we’re going to be looking at saying, “What other options do we have. I don’t want to dump all of your three million dollars of Amazon stock. It’s just going to crush you with taxes. You’re going to give almost a million dollars to the IRS. This is insane. So what we want to do is come up with a strategy that slowly works out of Amazon to a lower level that provides you income, but also protects you on the downside just in case something crazy and Amazon stock drops. Is that going to be okay?”
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I love that. And it’s really critical to just to walk them through each step of the way. Again, not any of that was attacking the client, not any of it was saying, “Hey, only idiot would be a hundred percent.” Not any of it was saying, “Hey, this is like Bear Stearns and Lehman Brothers or Kodak or any other failed company.” Again, you’re starting with their goals. And all financial planning should be goal oriented. In this case, we’re using the buckets as a sort of catch for their goals. And then working back, our goal is to accomplish this. How do we best get there?
Micah Shilanski: Absolutely. And again, this is walking the client one step at a time through little decisions. It’s not sell five million dollars of Amazon. It’s number one, we agree on how much we need in our war chest, how much we need in our cash bucket. Sweet. How do we want to fill that? Let’s do that. How much do we need in bonds? Sweet. How are we going to fill that? You can say, “Great. How do we take care of this other pie?” And then we can get into the more complicated strategy, which are options, which I know you and I were talking about a little bit more. There’s a lot of creativity we could do with an option strategy with that much of a concentrated position.
Matthew Jarvis: Yeah, for sure. For sure. And we’ll dive into some of that strategy on the backstage pass on the forum. But I want to touch Micah if you don’t mind, this was a really extreme example. Five million dollars, basically a hundred percent in one position. This is a real black and white issue. This has to be addressed. How about when it’s a smaller position? So let’s say again, five million dollars net worth. And they’ve got a million dollars sitting in Amazon stock. And this is something that I’ve run into with clients. And I’ll kind of walk through how I handle that. And I’d love your thoughts. One of the things we do is we say, when we have a concentrated position, we can’t include it in the guardrails because it’s too unpredictable. The guard rails are built on a diversified portfolio. And so if you want to keep a million dollars in Amazon stock, that’s fine. There’s risks involved. We’re going to make sure it’s noted on the IPS just as a CYA. But we’re not going to include it in the guardrails because it’s just an unpredictable position.
And then one of my other things is I won’t ever let a … I don’t want to say let. I will strongly advise a client … Well, that’s a deal breaker now that I think through it. Concentrated positions can’t be more than 20% of their overall net worth. It’s just too big of a risk. That’s just something that … Now again, I know there’s plenty of advisors that will say, “I’m okay if it’s 50% or 75%.” Perfect, I will recommend the client go see that advisor. For me, 20% the limit. I can’t see more than 20% in a position. That might take a couple of years to get there, but I just can’t go over that number.
Micah Shilanski: And for me it’s would this devastate their financial future. So I don’t have a percentage. It’s more of a relative number. So maybe I should be a little bit more of a percent, but for me it works out. I have a client with a tremendous amount of Exxon stock that they’ve inherited allowing 30-35% of their investible assets in one stock. But they have multi-million dollars in assets. And it really, they need $2,000 a month because social security and the two pensions they have coming in. So I don’t care that it’s 35%. It doesn’t jeopardize their financial future. So that’s the rule that I go to. Does it jeopardize your financial future this close to zero? It does. Deal breaker. We have to bring something else.
Matthew Jarvis: That’s a good point, Micah. Because even for some people, if they need their entire portfolio’s worth of income, then even yeah, 20% position would be too much. Because if that goes to zero, now their income is going to be cut dramatically.
Micah Shilanski: Yeah. So let’s take this example. So a little bit, I don’t want to say more realistic because all of this can clearly happen, but something you’d see a little bit more common, which is a client comes in and they got three million dollars. They got a million dollars in Amazon. That’s going to be there. And let’s just say it’s all after tax money just to make it fun with a very low basis. And so it’s not a simple change. How are you going to work them out of it?
Matthew Jarvis: Yeah. And I’ve actually got a couple of these. I’ve got one with Apple stock, one with Berkshire Hathaway stock, one with Adobe stock. I mean, I’ve got several different ones of these. So what we’ll look at … and some of these are rule of thumbs, but you’ve got to have something to work off of. What I’ll usually tell the client is, “Hey, we need to get down to this target amount. This is too much risk. And we’ll walk through the whole thing because of your goals. And then what we’ll look at it usually is how much can we sell each year without triggering some insane other tax issues.” So to your earlier point about gains harvesting, let’s harvest a certain amount of these gains every single year. We can do those on price triggers. I don’t particularly like that.
Sometimes we just say, “Hey, every January we’re going to sell.” And we’re not really concerned about where the market’s at because we’ll sell at whatever the level is and we’ll get right back in the next day. But every January we’re going to harvest $100,000 in losses or whatever it makes sense in their tax situation. But we’ve got to start whittling that down.
Micah Shilanski: Do you ever have clients that ask you, “Well, Matthew, don’t you have to sell and wait a certain period of time before you can rebuy where they get the capital loss rules versus capital gain rules diffused?”
Matthew Jarvis: Yeah. Sometimes clients do. And I say, “Yeah, but those rules are constantly changing. And it used to sort of work like that.” Sometimes they cite an old rule. Sometimes they cite something that was just never a rule. And instead of debunking, I say, “You know what? Those rules change pretty often. One of my jobs is to stay on top of that. And as the rule stands right now, here’s what we can do. We can sell it all one day. You’ve owned it for more than a year. So we’re going to get the best tax treatment possible. We’ll reinvest it the same day, and we’ll be perfect.”
Micah Shilanski: Now, that scripting that Jarvis had, really take that and embody that because that you can use it in so many different times, whether people are talking about personal exemptions on their tax returns, whether people are talking about the standard deduction was $6,000. Or they’re talking about, I can sell my house. What’s my lifetime of a quarter million dollar tax exemption? So all of those things, you could use that. And again, it’s not about telling me it didn’t exist or it changed 15 years ago. It’s all about just saying, “Yeah, those laws were rapidly change. Here’s our current set,” and you move on. I love that.
Matthew Jarvis: Yeah. I’m also going to be careful. This is a bit of a sidebar here. I don’t need to correct every wrong statement a client makes. If it’s not a material statement, if they say, “Hey, I want to keep supporting this charity because of I get this charitable deduction,” and I’m looking and saying they’re not itemized, they’re not getting it, but it’s because they’re giving $200 a month to their church, I’m not going to spend lot of time there. Then I’m going to say, “Hey, those deduction laws are a little bit complicated. I’m glad to see that you’re supporting your church,” or whatever the cause is. I don’t need to fact check everything they say. Otherwise again, I’m back to the parent denying them candy. And back to the school teacher slapping their wrist for getting two plus two wrong. I just don’t need to be in that situation.
Micah Shilanski: Yeah. Amen. That’s great. So anything else we would talk about on these concentrated positions, Jarvis?
Matthew Jarvis: A couple of things. One would be don’t overdo it. There’s this temptation to say, “Man, I should hit this thing from 20 different points why they shouldn’t have Amazon stock.” And I really just want to do one point at a time. And if the first one doesn’t stick, then I might go to a second one. I probably am not going to go past a third one. I’m going to be like, “Hey, there’s so much of an emotional wall here. We’re not getting through. I’m not communicating effectively.” I’m not going to hit him with 20 different ways. I’m not going to pull out stock charts. I’m not going to talk about Lehman Brothers or Bear Stearns or GM or whatever.
I might say, “Hey, can, can you think of any investment grades, any mutual funds, any hedge funds, Warren Buffet or whomever has 100% of their nest egg in one company?” There’s not many. But again, I always want to be careful with examples because sure enough they’ll know somebody. That’s like, well, Anne Matilda, she lived in Nebraska and put all of her money in Berkshire Hathaway stock from day one and she’s got four billion dollars. All right, great. What am I going to do with that one? So be careful with those. Go back to Micah’s what are we trying to accomplish, what risks are catastrophic, what risks could destroy your goals and highlight those. And then stand firm there. “Hey, we have to fill the cash bucket with 300,000. How are we going to do it?” “I don’t know. I won’t sell Amazon stock.” “Okay. I guess we’re done here. My only approach is the bucket approach or guardrails, whatever you’re using. And if you don’t want to play by those games, then you’re going to find another advisor. And I wish you all the best.”
Micah Shilanski: So what is on the billing question that’s going to be there? So let’s say a client said they wanted to do this. Let’s just take this for example. But I’m just going to start making up some more facts in here, because that’ll be fine. So they got five million I dollars in Amazon stock. Let’s say you have 100,000 on outside assets, which you can manage now. And they’re willing to sell like 3 or 4% a year, but they don’t want, of course, to pay the management fees, financial planning fees, et cetera, anything else on the five million of Amazon stock? What do you do?
Matthew Jarvis: This one feels like a really slippery slope. I feel like I’m giving a lot. And that has me really nervous. So that exact scenario I’d be pretty nervous on. Typically, Micah, it depends on the client. A lot of times I’ll exempt a concentrated position if they’re saying, “Hey, I’m just going to park this in the account.” Part of that is just liability. Some of it’s head trash. But part of it’s liability. Like I’m saying, “Hey, this is your concentrated position. It’s noted in the IPS. We’re not managing it. Therefore we’re not charging on it.” It’s a little bit of a CYA for me. If the client had five million in stock and they said, “Hey, we’re going to liquidate 3% a year,” I just wouldn’t take the account. But what about you, Micah? What’s your position on billion for concentrate positions?
Micah Shilanski: Great, so client I gave an example of that has a lot of Exxon is excluded assets, so we’re not billing on that because we’re not managing it. Now I’ve had other clients that have come in with concentrated positions that we’re actively working on getting them down. So wherever we’re going to remainder and keep, then we’re going to leave it as an excluded asset. Now, anything that we’re going to work on and work that down is absolutely a billable asset. Am I working on it, am I managing it, et cetera could be an argument we should be billing on the entire thing. Could be an argument you shouldn’t. I mean, you can definitely go both ways. But that is the way that we handle it. And again, I’m not going to take a client that’s only the best 3% a year. It just doesn’t meet my IPS.
Matthew Jarvis: Yeah. And whichever way you’re going to approach that, you need to decide that before the meeting. You can’t be in the meeting and saying, “Well, we’ll bill on half of it and not the other.” You’ve got to have that decided before you walk in.
Micah Shilanski: And that’s the other thing I want to end on right here is really talking about what are those decision matrix an coursing mechanisms that you need to put in place. Now, 99 times out of 100, I do not have clients force them to make decisions in my conference room. If they want to talk about it and want to circle back next time, absolutely. There’s lots going on. It’s their money. We need to make sure they’re super comfortable with it. So we’re not forcing that. But I’m going to put a deadline. So in this example is five million dollars, great, by our next meeting, by X, Y, and Z, we need to make a decision on what we’re going to do with this. So then that way we all know what it’s going to be. Otherwise, it turns into a two year conversations. They’re still owning that same five million Amazon sock and no one wants to make a decision. So the answer is no.
And this goes back to, do you believe in what you do? And if you do, then do what you believe. And is having a concentrated position of a hundred percent of your assets in one stock a good idea? No, it is not yet. It can work, but that is not what we do as financial planners. So if you truly believe that, you have to stick to your guns and not let a client weasel through, slip through, and whatever you want to say here and not really follow your planning process.
Matthew Jarvis: Yeah. One of the things that keeps me motivated through that, Micah, and helps me overcome my head trash is just to say, “Great. How will I defend this in court?” So the client’s got an Amazon stock position of five, their entire net worth, the company collapses and then they die the next day. And I’m facing their four children that all have ravenous attorneys saying, “Hey, how did you let mom stay with five million dollars of Amazon stock?” Great. How am I going to defend that one in court? “Well, I kind of told her.” “But you still charged her a fee. You kept meeting with her. It didn’t sound like you really were that passionate about it. Your emails were kind of weasley like, ‘Hey, maybe you probably should,.'” Again, this may be a straw man argument, but I just walk myself through it and say, “Hey, I don’t want to defend this in court. I don’t want to defend this to beneficiaries why we were a hundred percent in one position. Therefore, I will not take the account.”
Again, everyone does that. If they said, “Hey, I want to commit fraud.” You’re saying, “I’m not going to facilitate that.” “I want to launder money to terrorist.” “Yeah. I’m just probably not going to facilitate that no matter the fee.” For me, it’s the same bucket. It’s whatever gets to your head trash.
Micah Shilanski: No, I love taking those extreme examples, because if we take to a point like outsourcing, we say, “Well, I don’t want to outsource blah, blah, blah. Do you make your own clothes? Do you grow your own food?” I mean, we all outsourced to a certain point.
Matthew Jarvis: Generate your own electricity?
Micah Shilanski: I mean, where do we want to go with this?
Matthew Jarvis: That’s right.
Micah Shilanski: So we all do this. Where’s your line? And really creating that line and setting those expectations with the client, you want to increase your practice, set clear expectations with your clients. They will love you for it because they know exactly what they’re going to expect when they come in to see you.
Matthew Jarvis: I love that. And I think that ties into one of our first action items, which is have in stone your deal breakers and your scripts for handling those situations. So Micah and I talked about our respective ones. I know walking into every prospect meeting what I will allow and what I will not allow. Now, once in a while I get one that I haven’t seen before. That’s pretty rare these days. And if that happens, then I’ll tell … In fact, I had one of these not long ago. And I told the prospect, I said this is the first time I run into the situation. I’m going to have to think about how I want to handle this. I’ll get back to in our next meeting. So feel free to do that, but I will not negotiate it. I will not question my beliefs during a prospect meeting.
Micah Shilanski: Yeah, absolutely not. Ties right into number two. Never, never, never, never, never sell your soul. The bill always comes due, sticking to your guns, sticking to your convictions, having it in stone. That’s inside of there. Every time you make an exception, it’s going to bite you in the butt because you’re not going to follow your process. You’re not going to do the things you’re supposed to do. Some Murphy’s going to be creeping up that’s right there. Again, take this back to the Peter Munch quote, “Even if you’re good, you’re only right 6 out of 10 times.” Imagine the people that are just average. Are we right 3 out of 10? So you really have to stick to your guns to make sure you’re in always taking care of the client.
Matthew Jarvis: Yeah. Those things, I don’t normally like the phrase slippery slope, but it is in fact a slippery slope. All right. Item number three. So we’re recording this podcast end of August. It’s probably airing sometime in September. You need to rally hard … November, whenever this is airing. You need to rally hard between now and the end of the year. Most of these moral dilemmas come up because you don’t have enough clients or prospects, and you think, “Oh, I’ve got to take this one. I’ll sell my soul to get this one. Because if I don’t that I won’t hit my goals or I won’t be able to pay for my luxuries.” You just need a prospect like a maniac. The solution to every problem really is to get more prospects and more clients so that you can have no problems. So I’ve got so many, I’d actually be glad to turn someone away. So I have fewer people to work with.
Micah Shilanski: Actually, I’m number four, set your expectations in advance with your clients. This shouldn’t be a surprise when they come into your office where you fall on things. Jarvis, and this is the same in your meetings as I’m meeting with clients and they ask a question, I’ll circle back to the buckets. I’ll circle back to the tax buckets. I’ll circle back to the war chest to all of these different things. It’s like, “Oh yeah, that makes sense because of dah, dah, dah, dah.” They know what to expect. They know the process I’m going to go through when answering their questions. The process is always the same and the answer can be different, because we’re put in different variables in our equation. But that process is always the same when I’m walking clients through it. And that’s an expectation so they know where I’m going to stand on those things.
Matthew Jarvis: Perfect. Perfect. And then as with every podcast episode, your blasted Bible action item is to go on to iTunes and give us five stars. We are also looking for some great guests to have on the podcast, not experts.
Micah Shilanski: That’s right.
Matthew Jarvis: We don’t really care for experts. We want to know from advisors who have implemented lessons from the perfect RIA, that are delivering massive value to clients, that are having the ability to take six months vacation, that are running a 50% profit margin. We want to talk to those advisors and highlight what it is they’re actually doing in their real practice to deliver massive value. So if that’s you shoot us an email [email protected] And we will be glad to consider you for a future episode.
Micah Shilanski: Awesome. Well, as always until next time, happy planning.
Matthew Jarvis: Happy planning.
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