I have spent much of my career helping advisors better understand equity compensation and how to integrate it with each client's overall financial planning and goals. Employers structure their offers in very different ways and maximizing profitability can be tricky.
Clients should ask their advisors questions about their equity compensations, but they may not know the right questions to ask. Here, I describe common questions clients might ask and suggest alternative questions counselors can ask to prompt richer discussions and find answers that are right for clients and their families.
Is now the right time to exercise my options?
When clients ask me this, the answer is quite simple: I don't know.
This is an opportunity to explore the issue more deeply with the client. They may be asking because their company's stock price has been volatile (or has appreciated recently) or perhaps because they need short-term cash.
Often, the customer has a specific goal and wants to exercise options because they are making a large purchase, for example. Exercising options at an inopportune time can lead to hidden costs, such as the time value of money. It can do more to recommend other sources for instant purchases.
Equity computing should be subject to the same careful consideration and planning as other client assets. Asking questions like, “What are you looking to achieve with your equity compensation?” can provide key details that allow you to provide a comprehensive strategy for the entire portfolio.
How do I exercise my options without paying tax?
This question also has an easy answer, albeit one that clients generally don't like: You can't—taxes are a natural part of compensation.
If a client asks this question, it usually means they want to maximize the value of their equity compensation, and that insight can inform additional strategy discussions with your client. Some strategies, for example, can lower the percentage the customer must pay to the government. However, every situation is different and may depend on the client's tax filing status, tax bracket, employer, compensation, goals and timeline. Any situation gets complicated in a hurry.
Inquiring clients may be looking for a quick technique to reduce taxes or a “how to,” rather than thinking about equity compensation as part of their comprehensive financial plan, one that accounts for taxes, long-term goals, estate planning and more. This question is an opportunity for you to demonstrate the value of comprehensive planning.
You can guide your clients with questions about their financial goals, such as “How does equity compensation and tax strategy fit into a larger financial plan?”
Do they ask at all?
A lack of client inquiries about equity compensation often accompanies a lack of action. Depending on the offset, this can lead to risks such as expired options or overweight portfolios.
As trusted advisors, it is important to integrate equity compounds into the overall financial planning discussion. Creating a space to talk about it can reveal thought patterns, misconceptions, or misconceptions your client may have. Better yet, such open discussions create opportunities for you to deepen your relationships with your customers.
To start, consider asking them something vague but non-threatening: “Tell me about your equity compensation.” Or, “How are you compensated for your work?”
I'm the first to admit that equity compensation can get complicated quickly. For this reason, customers often do (and should) ask questions. For you, the advisor, this means an opportunity to get to know the client better, which means you'll be better able to anticipate the client's concerns, educate them, reinforce a comprehensive financial plan, and, again , deepen your relationship with him.
If clients and advisors think about compensation in the context of the broader portfolio, plan, tax strategy, etc., the results will be stronger and better aligned with the client's goals.
Greg Evans is Director of Equity Compensation Planning at RWA Wealth Partners.