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David Blanchett

Portfolio > Portfolio Construction > Investment Strategies

Advisors Divided on How Much Employer Stock Clients Should Own

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What You Need to Know

  • Most advisors consider the stock of a client's employer a risky asset.
  • Many advisors appear comfortable with larger allocations to employer stock than to other risky assets.
  • While research suggests holding little or no employer stock, there are behavioral aspects to consider.

Owning employer stock is typically considered relatively risky, due not only to the risks associated with owning a single security, but also given the positive correlation to other sources of investor wealth (i.e., human capital).

While research on optimal household allocations to employer stock typically suggest portfolio weights should be incredibly low or zero, financial advisor perceptions regarding the potential risks are likely to vary.

In a recent survey of financial advisors, I find notable differences in the perception of risk of owning employer stock, although there is relative consensus that allocations to employer stock should be less than 10% of an investor’s total financial assets and that there should at least be a 15% discount before purchasing.  

Since there isn’t one “right answer” in terms of appropriate allocations, it’s important for financial advisors to take a thoughtful approach when providing guidance to clients regarding owning employer stock, especially when considering the various behavioral and economic implications of doing so.

Allocating to Employer Stock

I recently worked with my colleagues in Prudential’s Marketing Insights & Analytics group to field a survey among financial advisors. The survey was conducted from July 10 to July 14, and 209 financial advisors responded. The survey covered a variety of topics, with a specific subset focused on allocations to employer securities.

Two questions focused on the maximum percentage of a client’s total investable assets the advisor would feel comfortable allocating to speculative assets. One focused more generally on maximum allocations to “speculative assets” (which explicitly noted cryptocurrencies as an example), while the other asked only about maximum allocations to employer stock. The graphic below includes the distribution of responses to the two questions.

Source: Author’s Calculations and Survey of 209 financial advisors conducted in July 2023

There are clearly differences of opinion among advisors when it comes to maximum allocations to speculative assets more generally or employer stock more specifically. To generalize the findings, though, it looks like while advisors try to limit allocations to more speculative assets, like cryptocurrencies, to no more than 5% of assets, they are more comfortable with allocations to employer stock, where they try to limit maximum allocations to 10% of financial assets.

Since there are clear risks allocating to employer stock, next I was curious what type of discount would typically be required before a financial advisor would be comfortable recommending it, and the distribution of results are included in the exhibit below.

Source: Author’s Calculations and Survey of 209 financial advisors conducted in July 2023

Again, there are some relatively extreme differences in perceptions. For example, while 13% of respondents would require no discount, 6% of respondents would never recommend owning it, regardless of the discount (i.e., even if it exceeded 20%).

The aggregate responses suggest that a discount of approximately 15% (i.e., somewhere between 10% and 20%) is the average discount required before a financial advisor would be comfortable actively recommending employer stock.

Conclusions

When building portfolios for clients it’s important to take a holistic perspective, since an investor’s financial assets are typically going to only be a small part of their larger overall economic balance sheet. This concept is best summarized by the title a of a piece I wrote awhile back for the Financial Analysts Journal titled “No Portfolio is an Island.”  

The implications of owning employer stock are going to vary materially by investor, based not only on that investor’s situation and preferences, but also the circumstances (and risks) of the respective employer security.

There are clearly risks associated with owning employer stock, and while more economic-focused research generally suggests low (or zero) allocations, it’s important to acknowledge the behavioral component of not owning employer stock if it does especially well (i.e., regret). Therefore, financial advisors are likely best served working with clients on their allocations and should set appropriate expectations around the expected risks and returns of owning an individual security.


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