Lessons Learned from the Automotive Industry

The bankruptcies of Chrysler and GM offer lessons on how to build and protect wealth

In a recent tweet, Tesla’s CEO Elon Musk explained that he maintains an around-the-clock work schedule because “Ford & Tesla are the only 2 American car companies to avoid bankruptcy.”

This led us to consider the fate of Chrysler and General Motors, members of the “Big Three” that did indeed file for bankruptcy (in 2009).

While Mr. Musk focuses on his work schedule, the primary lesson we derive from these bankruptcies is that, when wealth is concentrated in a single company, the risk of that concentration must be carefully managed.

In addition, it is important not to overlook the risk in Non-Qualified Deferred Compensation (NQDC) retirement plans. These plans are unsecured and unfunded “promises to pay” from the sponsoring company.

For example, the “new” GM currently offers at least one such plan, noting that:

All amounts deferred under the Plan shall remain the sole property of the Company, subject to the claims of its general creditors and available for use by the Company for whatever purposes are desired. With respect to amounts deferred, a Participant shall be merely a general creditor of the Company and the obligation of the Company hereunder shall be purely contractual and shall not be funded or secured in any way.

When Chrysler filed for bankruptcy, 400 participants, including Chairman Lee Iacocca, lost their entire account balance, according to McDermott Will & Emery. While a “rabbi trust” was in place to help protect the plan, $200 million from the rabbi trust was used for company operations. Nearly eight years of litigation followed, resulting in still no recoveries for participants.

In short, the lessons we derive are (1) the risks of deferred compensation should be appreciated and actively managed – as the IRS allows, (2) rabbi trusts have their limitations, and (3) protracted litigation may not result in any meaningful recoveries.

For a comprehensive look at the risks of automotive companies, we recommend this list of defunct automobile manufacturers of the United States.

NCEO Conducts Webinar and Session on Single-Stock Risk Management

Atlanta Conference Draws Record 1,800 Attendees

NCEO Conducts Webinar and Session on Single-Stock Risk Management

In April, the National Center for Employee Ownership, the leading organization focused on broad-based employee ownership, conducted a webinar and conference session on the topic of single-stock risk management. One of the primary vehicles for broad-based employee ownership is the Employee Stock Ownership Plan (ESOP), which invests primarily in a single stock.

The webinar, entitled New Financial Strategies for ESOPs, took place on April 3 and can be accessed here.

The conference session, entitled Single-Stock Concentration Risk Management, took place on April 18 and can be accessed here.

For both events, Brian Yolles, CEO of StockShield, joined distinguished thought leaders in underscoring the importance of managing stock concentration risk. Thought leaders included Jerry Kaplan (Delaware Place Advisory Services), Peter Newman (Peak Wealth Planning), and Doug Pugliese (Alpha Architect).

Boston Conference to Focus on Financial Planning for Executives & Directors

Inaugural Event to Take Place on June 18, 2018

Boston Conference to Focus on Financial Planning for Executives & Directors, the leading independent educational resource on equity compensation, will be conducting a one-day conference in Boston on June 18, 2018, entitled Financial Planning for Public Company Executives & Directors.

The conference is designed for professionals working with or seeking to advise executives, directors, and high-net-worth employees who have stock compensation and holdings of company stock.

Brian Yolles, CEO of StockShield, will be participating in a panel discussion entitled Strategies for Concentrated Positions in Company Stock. The session will discuss various approaches to mitigating the risks of concentration in a single stock, including hedging strategies (prepaid variable forwards, equity collars, protective puts, covered calls); exchange funds; and stock protection trusts.

The conference’s full agenda and registration information can be accessed here.

CFA Society Hosts Seminar on Protecting Highly-Appreciated Stocks

Panel includes Tom Boczar, Elizabeth Ostrander, Mark Leeds, and Brian Yolles

CFA Society Hosts Seminar on Protecting Highly-Appreciated Stocks

CFA Society New York, the largest CFA society in the world with more than 10,000 members, hosted a seminar on September 27, 2017, to provide a comprehensive overview of strategies available to mitigate the risk of concentrated and highly-appreciated stock positions. Entitled “Protecting Highly Appreciated Stock Positions: The State of the Art,” the panel was moderated by Tom Boczar, CEO of Intelligent Edge Advisors, and included Elizabeth Ostrander, Head of Business Development for Intelligent Edge; Mark Leeds, Tax Transactions & Consulting Partner in Mayer Brown’s New York office; and Brian Yolles, CEO of StockShield.

The seminar can be viewed online and slides accessed here.



CFA Institute Interviews Elizabeth Ostrander about Stock Protection Trust

Discussion focuses on innovation in managing single-stock concentration risk

CFA Institute Interviews Elizabeth Ostrander about Stock Protection Trust

As part of the CFA Institute’s Take 15 Podcast Series, Robert Dannhauser, head of Global Private Wealth Management for the CFA Institute, has interviewed Elizabeth Ostrander, Senior Vice President of Intelligent Edge Advisors, to discuss innovation in the field of stock concentration risk management.

“Whether the result of equity-based compensation from employment at public companies, or the rewards of a liquidity event borne of entrepreneurial success, concentrated single-stock positions are a relatively common circumstance for wealthy individuals,” according to the CFA Institute. “Clients may prefer to maintain ownership for a variety of reasons, leaving a significant risk management challenge for the advisor.”

“Elizabeth Ostrander, CFA, discusses some of the common approaches to managing such concentrated positions, including a recent ‘stock protection fund’ innovation that involves investors pooling a cash buffer to diminish or negate losses over time.”

Dannhauser notes, “It’s nice to see another innovation that people can use in advising clients with this increasingly common situation of having a concentrated position in their portfolio. It’s certainly another tool in the tool box, which is great.”

The interview can be accessed here.

The Take 15 Series is a series of short interviews with leading practitioners on timely topics focused on the investment profession.

The CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials. The organization is a champion for ethical behavior in investment markets and a respected source of knowledge in the global financial community. The end goal: to create an environment where investors’ interests come first, markets function at their best, and economies grow. CFA Institute has over 148,000 members in 163 countries and territories, including 142,000 CFA charterholders, and 148 member societies.

Janus Capital Suggests Wealth Advisors Consider Stock Protection Trust

Describes Fund as new tool advisors can use to manage an investor’s concentrated stock position

Janus Capital Suggests Wealth Advisors Consider Stock Protection Trust

Janus Capital Group, the global investment management firm with nearly $200 billion under management, suggested wealth advisors consider adding the Stock Protection Trust to client portfolios as part of its annual Wealth Advisor’s Guide to 2017. Janus described the Fund as a new tool advisors can use to manage an investor’s concentrated stock position, without incurring taxes or encumbering the underlying shares.

The ThinkAdvisor network, which is comprised of as well as Investment Advisor and Research magazines, covered Janus’ recommendations by highlighting the Stock Protection Trust as one of three investment types advisors should consider (in addition to ESG Funds and Foreign Equities).

Financial Advisor magazine included the Stock Protection Trust as one of five trends advisors can use to differentiate themselves in the marketplace.

Further Reading