Excerpt from Financial Planning, published April 30, 2019
Advisors say their caution is well founded. Between the overall difficulty of stock picking, the sometimes low performance of stocks following their IPOs, the incentives of those initially selling the shares and the lack of knowledge clients generally have about the companies they’re interested in, the enterprise is much more likely to go poorly than well, say several advisors who were surveyed about their own experiences with client requests about IPOs.
“It’s kind of a roulette table,” says advisor Eric Walters, founder of SilverCrest Wealth Planning. "Is it possible Slack is going to be the new Facebook? Yeah, maybe.” But consider the IPO-tracking ETF from Renaissance Capital, he says. It has underperformed the S&P 500 at most milestones in its first decade.
Encourage them to wait
Because insiders cashing out stock will drive the price down, says Walters, and because there is little data to evaluate the company, try to convince clients that they should wait 12 to 18 months to invest. By that point, he says, many clients will have lost interest or, if they are still following the stock, they will likely have seen its value fall. “Usually they’ll draw the conclusions themselves,” he says. And if they are still interested in buying, they will have many quarters of data to inform that decision.