I’ve 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 offerings in widely different ways, and maximizing the benefit 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 outline common questions clients may ask, and suggest alternative questions advisors can pose to foster richer discussions and come to the right answers for the clients and their families.
Is Now the Right Time to Exercise My Options?
When clients ask me this, the answer is quite easy: I don’t know.
This is an opportunity to explore the issue more deeply with the client. They might ask because their company’s stock price has been volatile (or recently appreciated) or maybe because they need short-term cash.
Often, the client has a specific goal and wants to exercise the options because they’re making a big purchase, for instance. Exercising options at an inopportune time may lead to hidden costs, such as the time value of money. It may make more sense to recommend other resources for immediate purchases.
Equity comp should be subject to the same scrutiny and deliberate planning as the client’s other assets. Asking questions like, “What are you looking to accomplish with your equity compensation?” may yield key details allowing you to provide a comprehensive strategy for the entire portfolio.
How Do I Exercise My Options Without Paying Taxes?
This question also has an easy answer, albeit one clients generally don’t like: You can’t—taxes are a natural part of compensation.
If a client poses this question, it typically means they want to maximize the value of their equity compensation, and that knowledge can inform additional strategy discussions with your client. Some strategies, for instance, can lower the percentage the client will have to pay back to the government. Still, each situation is different and may depend on the client’s tax filing status, tax bracket, employer, compensation, goals and timeline. Every situation gets complicated in a hurry.
The clients who ask might be looking for a quick technique to lower taxes or a “how-to " rather than thinking about equity compensation as part of their holistic 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 prompts about their financial goals, such as “How do equity compensation and tax strategy factor into a broader financial plan?”
Do They Ask At All?
A lack of client questions about equity compensation often accompanies a lack of action. Depending on the compensation, this can lead to risks such as expired options or overweighted portfolios.
As trusted advisors, it is important to integrate equity comp into the overall financial planning discussion. Creating a space to talk about it may reveal thought patterns, misunderstandings, or misconceptions your client may have. Better yet, such open-ended discussions create opportunities for you to deepen your client relationships.
To start, consider asking them something vague but unthreatening: “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 that reason, clients often do (and should) ask questions. For you, the advisor, it means an opportunity to get to know the client better, which means you will be better able to anticipate the client’s concerns, educate them, reinforce an overarching financial plan and, again, deepen your relationship with them.
If clients and advisors think about compensation in the context of the broader portfolio, plan, tax strategy, etc., the outcomes will be stronger and better aligned with the client’s goals.
Greg Evans is the Equity Compensation Planning Director at RWA Wealth Partners.
