As a top-level executive, you likely deal with some level of financial planning in your day-to-day job. You may even be a CFO yourself, which would mean you weigh in on financial decisions involving millions, or even billions, of dollars. You are uniquely qualified in your position to do what you do. In the same way, certain wealth managers are uniquely qualified to consult with executives like yourself on your financial planning strategies. If you plan on managing your finances yourself, you may find that you are much like the plumber with the leaky pipe in his own home.
Executives are extremely busy and, unfortunately, their personal financial planning often takes a back seat to that of their companies. While it’s true that some financial planning strategies and challenges are universal, there is no denying that top-level executives have specific challenges that elicit unique strategies. If you haven’t taken the time to seek out the advice of a wealth manager who specializes in consulting executives about unique financial planning challenges, I would highly encourage you to do so. Not only will you get a fresh perspective on your individual financial planning needs, but you will be exposed to unique and custom solutions.
Here’s a closer look at the most common challenges faced when it comes to financial planning for corporate executives and some strategies to counteract them.
Reach out today to consult with a wealth manager who specializes in financial planning for corporate executives.
Unique Challenges and Solutions in Financial Planning for Corporate Executives
Whether you find yourself with stock options, restricted stock units, or other forms of equity compensation, making decisions and planning around them is a challenge nearly all executives face. You should know that each type of executive compensation has its own set of pros and cons, as well as strategies that can help maximize their benefits. There is, however, one common place to start that should prove effective for you in your financial planning as a corporate executive and that is with an equity compensation planning report.
An effective financial advisor will be able to generate this report that outlines the potential outcomes for each decision you face with your equity compensation. It should address how exercising options at different times can generate different results. Once you have had the opportunity to review your equity compensation report, there are three major strategies when it comes to newly acquired company stock:
- Hold: You can simply choose to hold onto the stock until you see fit to sell. This is a strategy that is implemented when you feel strongly about the long-term growth of your company and do not have a need for supplemental income in the near future.
- Sell: You can choose to sell the stock for multiple reasons, including a need for supplemental income, questionable future company growth, an over-concentration, or even a favorable tax situation for capital gains in a given year.
- Swap: Lastly, you could utilize a stock swap strategy through which you could use previously owned company stock with a low cost basis and swap it out for new company stock in which you have a higher cost basis. This results in lower capital gains taxation and limits the need for out-of-pocket cash to purchase the new stock.
Choosing to hold, sell, or swap your company stock is not an easy decision. It is imperative to work with an advisor who addresses all of your concerns regarding your equity compensation while giving you tangible feedback and advice that you can implement with confidence.
Equity compensation is a tremendous way to build wealth, especially if your company continues to grow and increase its share price. However, the unfortunate negative side effect of tremendous stock growth is that you can easily become unbalanced within your portfolio and develop a concentrated stock position. This is another challenge faced by executives in their financial planning. Because this is so common, however, there are strategies to offset and/or balance the risk of a concentrated stock position.
- Exchange fund strategy: An exchange fund allows you to pool your concentrated stock position together with other stockholders with high concentrations of their respective stock as a way to build a diversified portfolio for the entire group. Once you have committed to the exchange fund, you receive shares of the fund itself, which is comprised of numerous shares of different stocks, therefore giving you instant diversification. One of the other big benefits of participating in an exchange fund is that there is no taxable incident until you sell the shares you own of the exchange fund itself, not when you pool your stock into the fund. This is a tremendous advantage considering that many executives have a low cost basis in their company stock, which would trigger a large tax bill upon the sale of the stock.
- Index proxy strategy: An index proxy strategy is another way to help diversify your concentrated stock position. This strategy, along with the exchange fund strategy, is best implemented with the help of an experienced executive financial advisor. An index proxy strategy utilizes software to help you sell off your concentrated stock at pre-determined increments and prices. So for example, if you want to harvest losses along with gains to help offset capital gains tax as you sell your stock, you might set up the index proxy to sell when the stock reaches $100 a share, as well as when or if the share price dips to $74 a share. This process is often implemented over the course of years to avoid heavy taxation in just one year as well as to avoid high market volatility in a given year.
Face Executive Financial Planning Challenges with the Right Advisor
No matter what financial planning challenges you face as an executive, take solace in knowing that you are not alone. There are other executives that have likely faced similar, if not the exact same, challenges you face. That is why it is imperative to work with a wealth manager who has experience specifically helping executives work through these challenges with unique and effective financial solutions. Don’t continue to push off your financial planning, hoping to get to it one day. Rather, reach out to an advisor who can allow you to do what you do best while they do what they do best.
K. Wade Carpenter, CFP®, AIF®, ChFC®, CLU®, is an innovative wealth manager serving corporate executives and entrepreneurs from coast to coast. Throughout his more than 25-year career, Wade’s focus on C-level clients has made him a top strategist for financial planning for corporate executives.
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