Financial advisors have been successfully using financial planning applications to attract new clients and assets under management for many years. However, financial planning and equity compensation analysis are very different. If you are using general financial planning tools to analyze and manage your client's company stock and option holdings you may not be maximizing the value of their equity compensation and you are probably missing out on timely diversification and reinvestment opportunities. The following table summarized the differences between these two complementary services:
Although their objectives are the same (i.e. attracting new clients and assets under management), financial planning and equity compensation analysis need to be viewed as "different" but "complementary." Financial planning generally focuses on obtaining financial goals such as retirement. Equity compensation analysis and management seeks to maximize their value and reduce risk by facilitating timely diversification decisions. This includes exercising and selling employee stock options and selling concentrated company stock positions.
Another big difference is that whereas financial planning is usually strategic and cash flow oriented, an equity compensation analysis has a more tactical focus. It uses share valuation, taxation and decision metrics to determine whether to take action at the present time. Financial planning also drives tactical decisions, but it generally uses multi-year models that project wealth accumulation and expenses to develop an investment strategy.
Advisors should also be aware of the differences in the effort required to create a full financial plan compared to an equity compensation analysis. Granted, "mini plans" can be created with just a few assumptions, but their value is limited. Comprehensive financial plans are data intensive and require detailed asset information and numerous assumptions. Compare this to an equity compensation analysis that only requires the client's grant summary statement and a few assumptions (i.e. tax rates, owned shares, value of other investments, etc.). Minimal data requirements for equity compensation plans leads to greater efficiency (and time is money) because they take less time to create and present to the client.
Lastly, take results into consideration. Financial plans can secure new clients and assets under management, but their recommendations are not generally urgent. An equity compensation analysis will often identify concentrated company stock positions and employee stock option grants that should be exercised and sold because the downside risk out weighs the upside potential. These compelling diversification opportunities have proven to be easy to sell and implement.
If you have clients or prospects with stock options, restricted stock and/or performance shares consider assisting them with a specialized equity compensation management platform like StockOpter.com. It won't replace your financial planning tools but it will enable you to provide a higher level of service that will systematically drive business over time.
Bill Dillhoefer is a vice president at Net Worth Strategies, Inc. a service firm specializing in equity compensation analysis and management. Bill led the development effort of a web-based stock plan decision support platform: www.StockOpter.com. This system is used by most of the major financial service firms to assist clients with company stock and options. He is the editor of the StockOpter University Blog which is dedicated to the topics of when to exercise employee stock options and diversify company stock holdings. Bill has spoken at the NASPP conference and to numerous advisor groups. Connect with him on LinkedIn or follow him @StockOpter.