Why Concentrated Stock Positions Are Hard to Find and Delicate to Handle

IN THIS ARTICLE

• What Is a Concentrated Position?
• How to Recognize Portfolio Risk
• Understanding the Client’s Mindset
• Strategies for Addressing Concentrated Positions

What Is a Concentrated Stock Position?

The stock that built a client's wealth is often the same one putting it at risk. According to a 2022 survey published in the Journal of Financial Economics, 15% of wealthy investors hold a single stock representing at least 10% of their net worth. For advisors, concentration risk is not a rare edge case, but rather a recurring feature of the portfolios you already manage.

A concentrated stock position occurs when a significant portion of a portfolio is held in a single security. These positions often arise from equity compensation, inheritance, or even a long-held investment that has appreciated substantially over time.

Keep in mind, there is no single universal threshold for what counts as concentrated, because risk depends on volatility as much as size. A position that exceeds roughly 10% of a client's investable assets is a commonly used starting point for advisors to take a closer look.

How to Recognize Risk in a Client's Portfolio

A client may not realize the concentrated holding in their portfolio poses additional risk. That's why a thorough discovery process is necessary rather than relying on what shows up passively in account statements.

Actual risk depends on the connection between weighting and volatility — not on concentration alone. Here's why. A volatile stock can meaningfully skew overall portfolio risk at even a 10% weighting, while a lower-volatility, dividend-paying stock may not register as a concern until it represents 20 to 30% of the portfolio. Two diagnostic questions give you a practical starting point:

1. What percentage of equity exposure sits in a single name or small basket?
2. How volatile is that exposure relative to the rest of the portfolio?

Keep in mind, the concentration question extends beyond individual holdings. The market itself can contribute to concentrated positions. This can happen when breadth is narrow and only a handful of companies are contributing to a large portion of gains. In this scenario, it's logical that the market funnels attention and money into a small set of leaders, simply because there's nowhere else strong to put it.

For a recent example of this, we can look to the 2023 — 2024-time frame, when the Magnificent Seven (top mega-cap technology companies) drove a vast majority of gains on the S&P 500.

Understanding the Client's Mindset

Identifying a concentrated position is only the first step. What follows is a conversation that requires deliberate, careful handling, because these positions frequently carry emotional weight. Leading with the benefits of addressing the position and staying anchored to the client's long-term goals keeps the conversation feeling like an opportunity rather than a directive. The dynamics that complicate these discussions are common. Your client may:

• View a successful holding as a point of personal pride
• Feel a sense of loyalty to whoever originally left them the stock, whether that's an employer they spent decades with or a family member

These emotional attachments are real and acknowledging them builds the trust needed to move the conversation forward.

Gaining an understanding of the client’s goals can keep this and future conversations grounded in what a client wants their wealth to do. It can also help break through client hesitation, as it will help them see that without a plan for this position, they are leaving real opportunities on the table.

"A more effective concentrated stock strategy begins not with the holding itself, but with a clear understanding of the client's goals, values, and vision for their wealth," says Tara Popernik, CFA®, CFP®, EVP Wealth Planning, LPL Financial. This perspective shifts the conversation from a transactional pitch about selling a stock to a discovery process grounded in what the client actually wants to accomplish.

Strategies for Addressing Concentrated Positions

Once you understand the client's goal, the strategy conversation becomes more productive. Four goal categories give you a quick way to orient a client toward the right starting point.

• Reduce the long-term risk of holding a volatile or outsized position. Since the objective is to gradually break up the position while minimizing the financial impact, a staged selling plan built around an agreed-upon capital gains budget is a strategy to consider.
• Diversify quickly without an immediate tax bill. Here, the goal shifts to introducing balance without triggering a taxable event.
• Maintain liquidity, without selling. Clients in this category typically don’t want to sell the position or cannot shoulder the resulting tax burden. Securities-backed line of credit or prepaid variable forward could be options these for these clients.
• Give philanthropically. In this scenario, the concentrated position becomes an opportunity to give in a tax-efficient way.

Next Steps— How LPL Can Help

Diversification may be a basic principle of portfolio management, but concentrated positions are rarely simple in practice. Client emotion, tax complexity, and situational nuance shape what actually counts as the right move.

You don’t have to navigate these conversations and strategies alone. Explore The Risk Hiding in High-Net-Worth Portfolios white paper for more in-depth information on concentrated stock positions. Building on the information here, the white paper includes detailed strategies for handling client conversations around emotionally charged holdings — plus more in-depth perspective on the strategies to consider when addressing each of the four client goals.

From helping you work through concentrated stock positions to other topics like estate and tax planning, LPL’s dedicated team is positioned to support advisors of high-net-worth clients. Schedule a consultation to learn more.