Managing CEO wealth: why do so many otherwise-capable executives make mistakes with their own personal finances?

Chief Executive, The, March, 2006 by C.J. Prince

Chief executives are charged with growing wealth for thousands of stakeholders, and personally sign their names to just about every major company decision. It seems only natural that they would transfer a little of that expertise to their own personal financial domain. Compared with billions of dollars of market cap, how complicated could one's individual portfolio be?

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Very, as it turns out--and as some have learned the hard way. By the time a CEO reaches the corner office, his or her portfolio has likely already grown to proportions that make managing it a full-time occupation. As salaries rise, compensation packages grow in complexity and stock options pile up, that portfolio becomes an unwieldy mass of diversified holdings, offshore accounts and steep tax traps lurking on every page.

Yet many CEOs have trouble recognizing that managing that complexity may be beyond the scope of their time, interest or expertise. "They often don't see it as a discipline, like being CEO of a company is a discipline, requiring a certain set of skills," says Robert C. Elliot, senior managing director at Bessemer Trust, a New York-based wealth management and investment advisory firm.

One technology company CEO, for example, saw his personal bottom line soar in 1999 as the company stock ballooned. But over the next year and a half, as the stock continued its decline, he refused to sell any shares, both reluctant to send the wrong message to Wall Street and convinced that the stock would rebound. Despite the fact that the company holdings represented 95 percent of his net worth, the CEO made no effort to diversify--until the shares were down 30 percent off their high. "That was a wake-up call," recalls Elliot, who worked with the CEO to develop a plan to offset some of the damage. It's a common enough example of CEOs missing the big picture. "The business of wealth management is really just as complex as running a Fortune 500 company because you have a totally different set of dynamics," he adds.

For one thing, creating millions of dollars of wealth over, say, a five-year period, doesn't necessarily use the same set of skills, or mind-set, as the task of preserving it across three or four generations. "CEOs tend to be short-term oriented by necessity," Elliot says. "If you're used to having to worry about quarterly results, it's hard to think in longer terms and ask, 'What's my wealth supposed to do every 10, 20 or 30 years?'"

CEOs also have trouble taking the critical eye they use on the job, and applying it to their own personal situations. They develop a soft spot for the family accountant, attorney or local broker who may have served them well early on in their careers, Elliot notes, but who might not be appropriate to help manage, say, a $70 million portfolio.

Moreover, top executives tend to put too much stock in their own ability to play the market, some experts say. Their narrowly focused expertise in their own industry can blind them to other key opportunities. "CEOs tend to invest in what they know well, but don't necessarily diversify," says Meloni Hallock, CEO of Acacia Wealth Advisors based in Los Angeles, who counts about half her clients as chief executives. "They've been very successful in one area or industry, so they have sort of an inside angle as to what's going on in that industry." The kinds of investments necessary to complement their portfolios often get short shrift, leaving them vulnerable to huge losses, adds Stephen Craffen, owner/principal and senior wealth manager with Baron Financial Group in Fair Lawn, N.J. "They may not understand that they need to have 5 to 8 percent in natural resources or 8 to 10 percent in real estate. They only understand one aspect of the picture."

For many CEOs, a preference for concentration in one-off investments comes naturally. It is, after all, through concentrated investments in a single stock or two that many of them made their fortunes. To take those positions and cash them in for a sedate, diversified portfolio that promises, at best, a 7 to 10 percent yield sounds, if not unwise, then boring as heck. It certainly doesn't have the same thrill as rolling the dice on a hedge fund that could jump 50 percent in one year. "The game is different and they may not enjoy that game as much," Elliot says.

Concentration in a single stock is an occupational hazard of the sitting public company CEO, who may receive restricted stock and can't liquidate positions on either a whim or well-reasoned strategy. If they cash out of a position too early or too quickly, they risk running afoul of Securities and Exchange Commission rules. And even when they can sell, corporate leaders are often loathe to send a signal to Wall Street that the company's top cheerleader is taking skin out of the game. "They feel a responsibility to continue holding the position," says Timothy Speiss, practice leader of Eisner LLP's Personal Wealth Advisory Group in New York.

The problem is particularly chronic among company founders and CEOs who've spent years turning around troubled companies. To them, diversifying out of their company stock undercuts their own message to investors: that the company will continue to outperform and the stock will rise. "That's where third-party objectivity comes into play," says Tim Kochis, CEO of Kochis Fitz, a wealth management firm in San Francisco. "It's very difficult, if not impossible, to be dispassionate about your own financial affairs."