Episode summary
Working With Legacy Investment Positions, With Rich Chen
Financial Advisor Success (Kitces)
· · 27 min · Hosts: Michael Kitces · Guests: Rich Chen
Summary
Legacy or concentrated stock positions can create a fiduciary problem for advisors when clients do not want to sell, whether the holding is employer stock, inherited shares, or another single-name position. Rich Chen said the core risk is often a mismatch between what the client expects and what the advisor actually agrees to do; if the advisor is effectively doing little while the client assumes ongoing oversight, that disconnect can lead to lawsuits or SEC action.
Chen framed the issue around the SEC’s two fiduciary duties: care, meaning ongoing management in the client’s best interest, and loyalty, meaning clear disclosure of services, pay, and conflicts. He emphasized that advisors need to document client restrictions, explain when a concentrated position is not ideal, and revisit the arrangement over time rather than treating it as a one-time conversation.
The discussion also covered billing. Chen said advisors may exclude the position, bill on the whole portfolio, or use a hybrid arrangement such as reduced or flat fees for limited monitoring. His bottom line was that the fee model matters less than whether the services, documentation, and client understanding match what the advisor is actually doing.
Key takeaways
- Rich Chen said mismatched expectations over legacy stock positions can expose advisors to lawsuit or SEC risk if they are not doing enough.
- The SEC’s duty of care requires ongoing management in the client’s best interest, not just a one-time recommendation, Chen said.
- Chen said advisors should clearly document client-imposed restrictions, the risks of concentration, and any advice to diversify or hedge over time.
- Billing can be handled by excluding the position, charging on the full portfolio, or using a reduced-fee hybrid approach, according to Chen.
- Chen said examiners will focus on whether the advisor’s work matches what was disclosed in the advisory agreement and client profile.
Notable quotes
“if advisers aren't doing very much, they subject themselves to possible, you know, lawsuit or, you know, an SEC action saying that basically they didn't satisfy their fiduciary duty to the client to act in their best interest”
“SEC registered firms owe two primary fiduciary duties. So, first is the duty of care, which is the the the one that most people think of when they think fiduciary duty”
“The second duty is the duty of loyalty which is the duty to provide all material facts relevant to the advisor services and understanding sort of what the adviser will do and what they're being paid for”
“make sure that there's proper documentation and that that is found you know in the in the advisor's form ADB but particularly in the advisory agreement right”
How the episode opens
And so when advisors have a disconnect with clients in terms of what the expectations are with respect to you know what to do with those investments that can create a problem because if advisers aren't doing very much they subject themselves to possible you know lawsuit or you know an SEC action. Hello and welcome back to the Financial Advisor Technician podcast. I'm your host Adam Vanusen.
On today's episode, we are going to discuss concentrated investment positions, which clients might have because they are made up of shares of stock of the company they work for, because they inherited a large position in a single stock from a family member, or for other reasons. While concentrated positions present a challenge from a portfolio management perspective, given that they can make up a substantial portion of a client's overall investments, working with clients who have these positions and particularly those who want to hold on to them can also raise compliance issues as the way they are managed and build on can sometimes be different than how the rest of the client's portfolio is treated. To help us dig deeper into this topic, I'm joined today by Rich Chen, the founder of Brightar Law Group, to discuss the fiduciary challenge of working with clients who have concentrated positions, potential pitfalls that could get advisers into hot water with the SEC or even lead to a lawsuit, options for charging fees on concentrated positions, and best practices for advisers to support these clients compliantly.
So, welcome, Rich, and thanks for joining us on the Financial Advisor Technician Podcast.
Thank you so much for having me, Adam. I'm excited to be here. — So to start, perhaps you could provide a quick rundown of why clients who hold legacy or concentrated positions can present challenges from an adviser for from an fiduciary perspective and you know what the consequences of that might be.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- legacy investment positions
- fiduciary duty
- compliance and sec examinations
- client imposed investment restrictions
- fee charging on concentrated stock
Companies and tickers mentioned
- Brightstar Law Group
Watch the episode
Watch “Working With Legacy Investment Positions, With Rich Chen” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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Financial Advisor Success (Kitces), this episode and its artwork belong to Michael Kitces. Octagon is not affiliated with the show; this page is an independent summary.
