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Managing a Financial Windfall With SRI

Judy McNary

CFP®, MBA, MSFP, Director of Corporate Responsibility


How can a financial windfall advance your socially responsible values? You may be feeling excited about the prospect of what you’ll do with this sudden wealth, but also conflicted if the money you received from an inheritance doesn’t reconcile with your values. This article will detail how managing a financial windfall with socially responsible investing, or SRI, can help you match your sudden wealth with your values.

Manage financial windfall

Financial windfall and socially responsible investing

You may have heard of the “Great Wealth Transfer” that is currently taking place, which shifts roughly $68 trillion in wealth from the Baby Boomer generation to Gen X and Millennials over the next 25 years.1 Leaving a legacy is a priority for many of our clients. After spending a lifetime building and nurturing wealth, one concern clients often voice is how to make sure their heirs preserve that wealth and spend it wisely. There are deep conversations taking place between the older and younger generations about tying in family values while preserving wealth for future generations.

For socially responsible individuals on the receiving side, managing a financial windfall can bring on a mix of emotions. You may feel grateful and excited, and pondering all the ways you could put that money to use. But sometimes, those who acquire sudden wealth can feel conflicted about this unexpected gift due to the underlying investments that don’t align with their values.

If 2020 has taught us anything so far, it’s that we have the power and responsibility to take ownership of our communities, our neighbors, and our planet. We talk to many clients who express interest in matching up their investments with their beliefs and values. Socially responsible investing (SRI) allows you to do just that. If you receive an inheritance of assets that don’t reconcile with your values, there are steps you can take to honor the gift while making changes to the underlying investments. Let’s look at an example to see how this works.


Case study: Transforming a legacy gift and unwinding concentrated positions

Marissa, a recent college graduate, has a small Roth individual retirement account (IRA) and has started saving in her company’s 401(k) plan. She is interested in learning more about SRI, which screens out investments in industries that are morally or ethically unacceptable. For example, SRI funds might avoid companies that sell alcohol, tobacco or guns. Marissa has inherited Philip Morris stock from her grandmother that is now worth $940,000. While grateful for this gift, she is uncomfortable owning stock of a tobacco company. What can Marissa do with her inheritance of Philip Morris stock?

Initially Marissa was concerned that selling the stock would go against her grandmother’s wishes. However, holding a concentrated stock position—which is any position greater than 5% of your portfolio—goes against our two rules of asset management, which are asset allocation and diversification. Asset allocation is the single most important decision that you make when it comes to investing, and when you have a highly concentrated position, it can throw off your asset allocation. The second rule is diversification which helps to lower risk and increase returns over time. A highly concentrated position is anything but diversification. The purpose of diversification, in our view, is to smooth out the peaks and valleys of the market and ensure you achieve your financial goals with the highest degree of confidence possible.

Once Marissa felt comfortable with these investment principles, she also realized her grandmother’s legacy was meant to help Marissa achieve her goals. Owning a diversified portfolio was the appropriate solution, so selling the Philip Morris stock would help Marissa to diversify and have a healthier portfolio. In addition, Marissa’s grandmother had owned the Philip Morris stock for over 40 years, during which time the price of the stock increased dramatically. Normally, when a stock is sold for more than it was purchased for, capital gains tax is owed on the difference between the sale price and the purchase price. However, because Marissa inherited the stock, she benefited from what is known as a ‘step up’ in basis. This meant that she could use the date of her grandmother’s passing as the market price for the stock, i.e. the starting price, rather than her grandmother’s original purchase price from 40 years ago. Since the stock price had not changed much during those three months since her grandmother’s passing, Marissa’s taxable gain was minimal on the sale. Marissa also learned from her uncle that while her grandmother was not a fan of Philip Morris, she held on to her stock because she knew that her granddaughter would benefit from her inheritance.

Marissa was able to use a portion of the proceeds as a down payment on a condo. With the remaining balance, Marissa funded her Roth IRA for the year and opened a brokerage account. Because Marissa had expressed interest in companies that focus on climate solutions, she was able to consider a diversified portfolio of SRI funds, stocks, and bonds that align with these values. Fossil fuel companies were excluded from this diversified portfolio and there was an extra emphasis on companies that focus on renewable energy, sustainable agriculture, and green building industries. These steps allowed Marissa to honor her grandmother’s gift, pursue her goal of investing in companies that reflect her values, and eliminate her concentrated position, giving her a strong financial plan.


Managing financial windfall into long-term portfolio value with SRI

How do you measure the intangibles, the impact of your life? At Mercer Advisors, we believe achieving Economic FreedomTM needn’t come at the expense of others or the environment. We believe, and the data proves, that investors can capture market returns (or potentially better) while still having a powerful and positive impact on the world around us. We are such firm believers in this that we were one of the first Registered Investment Advisers to sign the UN-backed “Principles for Responsible Investing,” a pledge whereby firms commit themselves to incorporating sustainability issues into their investment processes.

As fiduciaries to our clients—and to future generations and the broader world in which we all live and work—we’re committed to doing our part to help solve our planet’s most tenacious challenges. If Marissa’s scenario resonates with you, talk to us about how we can help you incorporate SRI as foundational elements to your wealth plan.

1The Great Wealth Transfer, Cerulli Associates 

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