Reviewing your investments and diversifying your portfolio away from concentrated holdings can help minimise the risk of losses.
Download our entrepreneur’s guide to wealth structuring
For many business owners, it’s not unusual to have a significant amount of wealth tied up in a single asset. Whether through the ownership or sale of a business, a large shareholding, or even an inheritance, the growth of a concentrated investment can be the source of generous rewards – as well as significant risks.
“Many people spend years focusing on their careers and then find they have amassed a large amount of wealth that is tied to a single asset,” says John Younger, managing director and head of client and business strategy at RBC Wealth Management in London. “It’s at this point that you want to know how to preserve it for the future.”
For most entrepreneurs, the primary source of wealth and income is their business. For anyone in this situation, it is important to take a holisitic view of your financial affairs and consider the different options available for protecting wealth in the event of a market or economic downturn. Similarly, for those who have concentrated investments in a single asset – perhaps through the sale of a business or the growth of an investment – steps should be taken to protect your wealth for the future.
While the growth of a concentrated investment might have created substantial wealth in the past, there is no guarantee this will continue in the future. Therefore it is important to be aware of the potential risks to this over the long term, says Guy Huntrods, head of investment specialists and execution at RBC Wealth Management in London.
“Those who hold onto these positions over time may experience downward price pressure from both company-specific and outside influences, which could derail future plans and exit strategies,” Huntrods says. “But with careful consideration and planning, your ride could be made smoother and more value could be derived from the asset.”
Mitigating the risk of loss has its benefits during all market and economic conditions, although it is perhaps even more important in the current environment. Financial markets have experienced a prolonged period of growth in the years following the 2008 financial crisis owing to ultra-low interest rates and aggressive stimulus measures.
Frederique Carrier, head of investment strategy at RBC Wealth Management in London, says all business cycles eventually show signs of old age. “As the business cycle becomes more and more mature, the chances of a market correction become more likely and this can represent a large risk for anyone with a large position in a single company.”
For some people, there is a disconnect between the work involved in building a business or amassing a large asset and the work to protect it from unforeseen events. “Many people know their company best, but what if something happens, such as an illness, a political event, a regulatory change or a market correction?” Huntrods says. “Threats can appear unexpectedly, so it is important for you to think about what you might need to do to protect or diversify your investments and be aware of the potential strategies available to you.”
The simplest solution to a concentrated investment is to sell some of your shares and invest elsewhere. But for some people this is neither possible nor desirable – especially business owners.
However, for those who have large shareholdings in listed companies, this may be because the securities cannot be sold until some point in the future, or because they want to retain certain privileges, such as voting rights. Others may be reluctant to sell as a result of an emotional attachment to the company or an expectation that the share price will rise in the future. For those whose wealth is tied to a successful but unlisted business or perhaps a large property portfolio, the situation is more challenging because it might not be desirable to sell a portion to outside investors.
“People can have several reasons for not wanting to sell the shares they hold in a company, whether it’s because you are emotionally attached to them or because there may be negative financial implications from doing so,” Younger says. “You need to find the most suitable solution or process, so that you can receive the best possible outcome.”
Divesting entirely from an asset doesn’t always make sense, particularly in the case of a family business. In situations where it is necessary to continue to hold the asset, hedging strategies can potentially act as insurance against any fall in the value of a stock. Alternatively, you could borrow against your portfolio and use the loan to invest in other assets. For business owners who do not want to sell shares in their company to investors, one option is to build a diversified investment portfolio from the income they draw from their business.
Concentrated investments pose plenty of challenges, and solving the problem is not always straightforward and will need to take into account your specific circumstances. But whether it means selling down a position and diversifying into other assets, or using hedging strategies, reducing concentration risk can play a vital role in protecting your wealth now and in the future.
We want to talk about your financial future.
This publication has been issued by RBC’s Wealth Management international division in the United Kingdom and the Channel Islands which is comprised of an international network of RBC® companies located in these jurisdictions and includes RBC Europe Limited and Royal Bank of Canada (Channel Islands) Limited. You should carefully read any risk warnings or regulatory disclosures in this publication or in any other literature accompanying this publication or transmitted to you by RBC’s Wealth Management international division.
This publication has been compiled from sources believed to be reliable, but no representation or warranty, express or implied is made to its accuracy, completeness or correctness. All opinions and estimates contained in this report are judgements as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, the value of investments and income arising can go down, future returns are not guaranteed, and an investor may not get back the amount originally invested. Countries throughout the world have their own laws regulating the types of securities and other investment products and services which may be offered to their residents, as well as the process for doing so. As a result, any securities or services discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice.
This material is prepared for general circulation and does not have regard to the particular circumstances or needs of any specific person who may read it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. To the full extent permitted by law none of the entities which comprise the international division of RBC Wealth Management nor any of their affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of RBC Wealth Management.
Clients of RBC Europe Limited may be entitled to compensation from the UK Financial Services Compensation Scheme (FSCS) if it cannot meet its obligations. This depends on the type of business and the circumstances of the claim. Most types of investment business are covered for up to a total of £85,000. For further information about the compensation provided by the FSCS scheme (including the amounts covered and eligibility to claim) please refer to the FSCS website FSCS.org.uk. Please note only compensation related queries should be directed to the FSCS. Royal Bank of Canada (Channel Islands) Limited is not covered by the UK Financial Services Compensation Scheme.
RBC Europe Limited is registered in England and Wales with company number 995939. Its registered office is 100 Bishopsgate, London EC2N 4AA. RBC Europe Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
Royal Bank of Canada (Channel Islands) Limited (“the Bank”) is regulated by the Jersey Financial Services Commission in the conduct of deposit taking, fund services and investment business in Jersey. The Bank’s general terms and conditions are updated from time to time and can be found at https://www.rbcwealthmanagement.com/en-eu/terms-and-conditions. Registered office: Gaspé House, 66-72 Esplanade, St. Helier, Jersey JE2 3QT, Channel Islands. Deposits made with Royal Bank of Canada (Channel Islands) Limited in Jersey are not covered by the UK Financial Services Compensation Scheme. Royal Bank of Canada (Channel Islands) Limited is a participant in the Jersey Bank Depositors Compensation Scheme. The Scheme offers protection for ‘eligible deposits’ up to £50,000 per individual claimant, subject to certain limitations. The maximum total amount of compensation is capped at £100,000,000 in any 5 year period. Full details of the Scheme and banking groups covered are available on the Government of Jersey’s website http://www.gov.je/dcs or on request.
Investment services offered by the Bank are not covered by an investor compensation scheme as there is currently no such scheme operating in Jersey, however ‘eligible deposits’ held pursuant to investment services may be protected under the Bank Depositors Compensation Scheme described above – for more information see the Bank’s general terms and conditions. Some of the products that the Bank might recommend to you could be registered overseas and may be covered by a local compensation scheme. Your investment counsellor will provide you with the details of any overseas compensation schemes (where applicable) at the time of making an investment recommendation.
Copies of the latest audited accounts are available upon request from the registered office. ® / ™ Trademark(s) of Royal Bank of Canada. Used under licence.