Clients Asking About IPOs? Here's a 5-Step Framework for the Conversation
Using these five steps, financial advisers can walk clients through the IPO process and the realities while also grounding the conversation in the client's long-term financial plan rather than focusing on short-term market hype.
When IPO activity picks up, client calls tend to follow. A high-profile company goes public, the financial press lights up, and suddenly, clients who have never considered investing in an IPO are asking whether they should get in.
These conversations can be genuinely useful, but they can also go sideways quickly if advisers aren't prepared to manage expectations alongside the enthusiasm.
Having a clear framework for these conversations helps. Here's how I think about it.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
1. Start with the fundamentals
Before getting into access or mechanics, it helps to anchor clients in why companies go public in the first place. While an IPO creates an investment opportunity for outside investors, it's primarily a capital-raising strategy.
The company needs funding to grow, pay down debt or give early investors and employees a path to liquidity. Going public is how they get it.
In exchange, the company accepts significant new obligations: Regular SEC reporting, public scrutiny from analysts and shareholders, plus ongoing regulatory oversight. These responsibilities shape how the offering is priced and who gets access first.
2. Walk clients through the process
Many investors have a vague sense of what an IPO is, but not a clear picture of how one comes together. Walking them through the basic mechanics sets up the risk conversation more naturally.
The company selects investment banks (underwriters) to manage the offering and determine pricing, share volume and allocation. Then, the company files a registration statement with the SEC, which includes a prospectus with financials, the business model and a detailed risk factors section.
Institutional investors get a first look during the "roadshow," where company leadership presents details about the IPO to build demand.
The offering price is finalized the night before trading begins and shares hit the market.
Educating investors on the process is important because your clients may assume IPO investing is as simple as clicking "buy" on their brokerage app. But most offerings aren't straightforward, and explaining why to your clients helps set the right expectations.
3. Clarify the three access points
When a client asks, "How do I get in on an IPO?" the honest answer is that it depends on when you want in and what you have access to. (I typically hate "it depends" answers, but it truly applies in this situation.)
There are three entry points, each with a meaningfully different profile:
Pre-IPO secondary markets. Before a company goes public, some shares may be available through secondary platforms, purchased from early employees or existing investors seeking liquidity.
This path is generally limited to accredited investors, involves limited disclosure and comes with transfer restrictions and higher operational complexity. Pricing can vary significantly from the IPO price, and fraud risk is elevated.
If a client is interested in this option, the channel matters enormously. Only established, regulated platforms with clear documentation of ownership and custodial arrangements should be considered.
IPO allocation. Participation in the actual offering, at the offer price, typically flows through broker-dealers that are part of the underwriting group. Institutional investors receive priority, and retail access can be limited.
In high-profile deals, demand often far exceeds available shares. Clients should understand that submitting interest isn't a commitment, and allocation isn't guaranteed.
Anyone promising guaranteed access to a hot IPO is waving a bright red flag.
Post-IPO trading. Once shares list on a public exchange, any investor can buy them through a standard brokerage account. This is the most accessible option and the one with the least operational complexity. It's also where most individual investors will land.
The trade-off is that newly public companies often see elevated volatility in the early weeks of trading as the market finds its footing.
We saw this in action with the SpaceX IPO earlier this year. The company's stock (SPCX) increased by more than 50% in the four days following its debut, then dropped back down around initial pricing in the subsequent two weeks.
4. Reframe the 'first-day pop' conversation
IPOs attract a lot of attention around first-day performance. A company opens 30% above its offer price, and it looks like a missed opportunity. If it drops 20% on day one, suddenly the whole asset class gets a side-eye.
Neither reaction is especially useful for long-term investors.
First-day price movements reflect a combination of limited float, pent-up retail demand and short-term sentiment, none of which are a reliable signal of where the company will be in three to five years.
Early enthusiasm has a way of fading once the lockup period expires and insiders can sell. Clients who buy in based on first-day momentum often find themselves holding a position they don't fully understand at a price that was set by very different market forces.
This is a good moment to bring the conversation back to fundamentals. Some good questions to ask:
- Does the client understand the company's business model?
- Have they looked at the prospectus, particularly the risk factors section?
- Does the offering fit within their time horizon, risk tolerance and overall portfolio composition?
- What percentage of their holdings would this represent, and are they comfortable with that level of concentration?
5. Tie it back to the plan
One of the most effective ways to manage IPO conversations is to redirect them toward your client's financial plan. An investment that generates a lot of headlines isn't automatically a good fit.
An IPO that most investors can't access at the offer price, carries meaningful volatility risk and represents a company with an unproven public track record deserves the same disciplined evaluation as anything else in the portfolio.
Access and hype are not the same thing as opportunity. Helping clients see the difference, and then evaluating each situation through the lens of their individual goals and risk profile, is exactly the kind of value a good adviser provides.
Related Content
- Are You Ready to Go Upmarket? What Advisers Need to Know
- How Advisers Can Establish Relationships With HNW Prospects
- Serving the HNW Market: How Financial Advisers Can Break Through and Deliver Lasting Value
- Global Uncertainty Has Investors Running Scared: This Is How Advisers Can Reassure Them
- Are You the Doer or the Visionary of Your Advisory Practice? Here's How You Can Make the Leap to Chief Vision Officer
