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I've recently taken a look at my 80-year old mother's finances, run by a money manager at Morgan-Stanley. Half of her $3.5M portfolio is in a single stock, namely JPM = J.P. Morgan. This seems to me irregular both in terms of risk, lack of diversification, and potential conflict of interest (I assume J.P. Morgan and Morgan-Stanley are not unrelated?)

Is this a suitable allocation of assets? To me it looks like borderline mismanagement, but I'm willing to be convinced otherwise. It is difficult to reallocate now without incurring cap. gains taxes.

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    JP Morgan and Morgan-Stanley are related only in that M-S was founded when JPM was split up 85 years ago. – RonJohn Nov 7 '19 at 18:15
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    What percent of the JPM position is capital gains? – Bob Baerker Nov 7 '19 at 18:43
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    Cost base is 1/3 current value. – Concerned Nov 7 '19 at 21:38
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    Is it stock or a mutual fund? JP Morgan has a slew of mutual funds designed for retirements within specific periods. If she's got all her stock in a single mutual fund it's not quite as bad, because they diversify on their end. If it's actually shares in a stock JPM though, two things. Banks have generally stable stocks so you could do worse (TSLA, PGE, etc.), and that's a much more dangerous position. – Anoplexian Nov 8 '19 at 16:29
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    @Harper - "When does your mother expect to need the money? 10 years? 20 years? 30 years?" With a portfolio value of $3.5 million dollars at age 80, you're concerned about when the money might be needed? – Bob Baerker Nov 8 '19 at 17:25
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This seems to me irregular both in terms of risk, lack of diversification

Me too.

Is this a suitable allocation of assets?

Putting 50% in one stock is acceptable, I think, if that one stock is a highly diversified and well-run investment company like Berkshire-Hathaway. (Apparently, half of Bill Gates' wealth is in B-H.)

Of course, a giant bank isn't B-H.

50% in the financial sector isn't terribly horrible, though.

To me it looks like borderline mismanagement

Signs of mismanagement would be:

  • churn: lots of buying and selling just to generate brokerage fees; you'd need to look for that, and
  • investing in poorly performing stocks. JPM's stock value has increased almost 6x since it's Dec '08 low, so that would be a hard sell as "mismanagement".

I'd want to ask them:

  1. why it's so weighted to one company, and
  2. what they think her investment goals are, and
  3. how long she's held the stock. (Maybe her husband invested the money in JPM way back when it was "only" 20% of the portfolio and organic growth means that it's now 50%.)
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    Who cares if the stock went up 6x since the Dec '08 low in absolute dollars? I want to know what it did compared to the S&P. – Harper - Reinstate Monica Nov 9 '19 at 1:00
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    @Harper, S&P is up 4x in that time frame. – prl Nov 9 '19 at 2:30
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    @Harper ratios don't care about absolute dollars. That's why I didn't write "JPM's stock value has increased $91 since it's Dec '08 low". – RonJohn Nov 9 '19 at 3:19
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Yes, this is terrible in terms of lack of diversification and concentrated risk.

Conflict of interest? No, because there's no benefit to Morgan Stanley if a client owns shares of JPM.

Mismanagement? Maybe, maybe not. This might be a violation of FINRA's "Know Your Client Rule" which requires a broker to assess each customer's financial situation, specifically in terms of financial needs, investment experience, investment objectives, liquidity needs, and risk tolerance. OTOH, if you mother (or father) insisted on purchasing this large block of JPM shares then there would be no hint of impropriety at all.

There are ways to protect this large position but are very limited, perhaps not even viable, if there are large cap gains that you don't want to realize. And I apologize for mentioning it but the reality is that there are also accelerated cost basis considerations when it comes to inheritance.

You're a bit of in between a rock and a hard place.

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    You might want to add a bit of clarification on why there's no benefit to M-S for a client owning JPM stock. I think many people assume they're related companies. – Joe Nov 8 '19 at 17:01
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    @BobBaerker But that comment will go away eventually, right? – user3067860 Nov 8 '19 at 17:13
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    Comments remain attached to the questions and answers. – Bob Baerker Nov 8 '19 at 17:25
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    @Concerned Fear the loss-man not the tax-man. – quid Nov 8 '19 at 18:20
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    @BobBaerker Comments can be deleted, so it's better to add the content of them to the relevant post if you want to make sure it's preserved. – Mast Nov 8 '19 at 20:41
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Given the capital gains basis on the stock, it would be practical for her to continue to hold it. It is potentially possible that JPM grow so much over the past 10 years that it went from a moderately weighted position (10-15%) to 50% and was not sold for tax reasons. With that in mind it is hard to tell if this is mismanagement as the adviser could be considering the tax implications. You should talk to mother about her specific goals and JPM could easily fit those objectives.

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I'm 62, getting ready for retirement, and in a similar situation. I worked for a dozen years at Microsoft, purchasing ESPP, getting stock grants, etc. My stay there nearly exactly coincided with Steve Ballmer's turn at CEO. During that time (except a large drop right after I started and a dip/recovery in 2008-2009), the stock remained completely flat. Though MSFT made up a sizeable, but not overwhelming, chunk of my wealth, it paid a good dividend and I was comfortable that it wasn't going to drop (like it did right after I started with the company).

Since I left that company, the stock price has quintupled and it now represents not quite 50% of my assets. It might make sense to sell off a large chunk and rebalance my portfolio, reducing my exposure to that one stock - but that comes with a large capital gains hit.

But, you know what - it pays a very good dividend, and though I'm not convinced that it's current run of growth will continue, I don't see it dipping more that 10 or 20%. My financial advisor and I have had long talks about this (i.e., "he knows his customer"), and I think we've come up with a plan that will slowly reduce that exposure. I realize that this may be crazy, but, it's worked so far.

As to your 80-year-old mother... she's got a MM$3.5 nest egg to spend over her next 0-20 years. Talk to her about the risks and make sure that she understands what she's doing (don't forget, JPM has grown a lot in the last 10 years -- she may be very happy with what she's got). If she understands what her situation is and what the risks are and is still comfortable, let her enjoy her wealth.

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  • Why would past performance make someone happy with what the person has now? Because it predicts future returns? Coz it really doesn't. – Harper - Reinstate Monica Nov 9 '19 at 0:58
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    @Harper "Because it predicts future returns?" No. It's because past performance is how her portfolio got to now. – RonJohn Nov 9 '19 at 3:24
  • @Flydog57 - What solution did you and your adviser come up with for reducing your concentrated risk? – Bob Baerker Nov 9 '19 at 22:41
  • We're going to sell some of it off slowly. Yeah, past performance, etc... but, the likelihood of growth is higher from a growth stock than from a dog. Other than how this one stock has overwhelmed my assets because of it's growth, I'm reasonably diversified – Flydog57 Nov 9 '19 at 23:55
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Is this a suitable allocation of assets?

All allocation of assets are of course up to the investor, the risks they are willing to take and the companies they want to support.

To me it looks like borderline mismanagement, but I'm willing to be convinced otherwise.

This is definitely strange, but large corporations are fairly stable. And $3.5M is a lot. Its unlikely that would drop to something unlivable. Remember, its 50% of the current value, not 50% of what was paid. The balance has likely changed a lot and that stock has grown well lately.

Short answer: It is weird but the risks and companies you support are up to the investor. The only objective statement we can say is usually larger profiles have more diversity.

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There is the question of what your mother's tax bracket is. If it's low, you might want to slowly rebalance the portfolio, i.e., sell a small portion of the JPM each year. This will generate a tax hit, with the offsetting benefit that you will be increasing the diversification of her portfolio.

Don't forget that these are long term capital gains we're talking about, so the tax rate shouldn't be that high.

Another consideration: If the Dems take control of the federal government there's a good change the long term capital gains rate will go up, maybe substantially. So if you want to do some selling, probably better to do it now than later.

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Mismanagement by Morgan Stanley? Only if they bought that much JPM stock for her. I don’t think their integrity is what you should be questioning but rather the choices you will make.

Personally, I bet that there's a high chance that your return will be within 2% over 5-10 years whether hold JPM or you diversify.

Ask your mother what she wants. That’s what really matters.

If I’m not mistaken, cost basis is stepped up after someone dies. This means if you sell right after your mother dies then capital gains are based on the price of JPM when she passed away.

In my opinion, the only way you will lose out money is if you try to take her money and go stock picking. The only thing I would EVER advise is buying a broad-based EFT like SPY and QQQ or putting the money in low cost mutual fund from Vanguard, all of which you can buy directly from Morgan Stanley. I think that you should sell no more than half of the JPM position and buy the general market.

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It would be almost impossible to diversify with 50% in one stock.

The risk is extremely high. Another 2008-like collapse would cost her roughly $1.5m. That may seem unlikely but keep in mind the Democrats are leading in the polls and they could very likely win like they did in 2007.

At 80 with a fairly decent amount of wealth the goal should be protecting the wealth and maybe producing a decent income. I would say 50% bonds, 25% mutual funds and 25% fully diversified stock portfolio could easily beat the 2.7% return from JPM and do so with vastly less risk.

As far as the stock itself I don't see a whole lot of upside. From a technical standpoint it is trending up so it should be okay over the short term but over the long term I would expect to see that come down a bit. JPM is trading at nearly twice book while both BAC and WFC are trading at just a little over book. Plus the growth estimate for next year is only 1%. If I owned the stock I'd be looking to ride the short term wave and then bail at the first hint that it's topped.

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