By James Miller from Wealth Solutions Report

StockOpter Software CEO Explains the Need for Advice on Options and Restricted Shares, How to Structure the Advice and How to Use That Skill to Prospect for Clients.

Years ago, I bought a car based on a spreadsheet a friend created and used for his own car purchase. (That friend later attended Harvard Business School, so his spreadsheets are no longer free.)

The spreadsheet crunched financial data and estimates including price, ongoing maintenance and repairs, warranty length, reliability, resale value and similar data to help you pick the right car. Using that spreadsheet, I chose a wonderfully functional car on paper with less pizzazz than a concrete block.

The spreadsheet wasn’t right for me because it didn’t take my own needs and desires into account – it asked the right questions and calculated the right answers for my friend, not me.

When it comes to exercising and selling employee compensation options and shares, most people make my mistake – they follow the calculations and parameters innocently set by someone else with a different situation and goals rather than taking a deep dive to tailor the parameters and essential questions to their own circumstances.

Informing the Decisions of Option and Restricted Share-Rich Clients

One firm that helps advisors give the right advice to clients and prospects on exercising and selling options and restricted shares is software provider Net Worth Strategies, through its StockOpter software as a service (SaaS) platform that enables clients and prospects to make profitable, tax-smart and informed decisions tailored to their
unique situation.

Founded in 1999, the firm’s users report that they generate over $750,000 in assets under management per client.

We sat down with Bill Dillhoefer, the CEO of Net Worth Strategies, a 22-year veteran of the firm and CEO since 2018, to discuss how advisors can reach out to prospects and clients about options and restricted shares and how to formulate the advice.

WSR: Where do employees with stock options or restricted shares/units currently get their advice on how and when to exercise their options and sell shares? Additionally, what kinds of mistakes are they making and how costly are these mistakes?

Dillhoefer: Unfortunately, I think most employees are not getting equity compensation guidance from financial advisors that specialize in this type of planning. Instead, they rely on “watercooler” advice from their peers. Every company has at least one equity compensation “expert” (AKA: Fred from Engineering) that built a spreadsheet for helping their fellow employees.

Although these people have good intentions and are generally very analytical, their advice is highly biased and not personalized.

A Schwab stock plan participant survey found that a mere 24% of respondents had exercised employee stock options or sold shares that were part of their equity compensation. This was attributed to a fear of making mistakes including exercising and selling under the wrong market conditions or from the potential tax implications of their decisions.

Equity compensation mistakes can be extremely costly particularly in volatile or down markets like the one we are currently experiencing. Many individual stocks are down from the beginning of the year by over 50%. Having to exercise options or sell shares in these markets due to expiration, job change, or cash flow requirements can result in a major reduction in value.

Mistakes occur when equity compensation recipients don’t have a way to evaluate the risk in their holdings to establish reasonable decision criteria. Believing that the stock price will continue to go up like it has for the past several years is unrealistic and dangerous.

Consequently, it is important to engage a financial advisor that understands equity compensation and has a process for tracking these holdings, evaluating risk and estimating taxes.

WSR: How should an advisor structure equity award advice for an employee who has a significant amount of value in company stock and options? What areas should they cover and how should they steer clients in those areas?

Dillhoefer: Company stock and option awards are fantastic wealth-building vehicles for employees. However, these awards come with complicated grant details and taxation rules. Additionally, because their value is based on an ever-changing stock price, they are subject to risks.

Equity award advice requires a solid understanding of the client’s grant details. This information can be found in the company stock plan and the employee grant documents.

Getting and reviewing these documents is critical, but advisors also need a system to track the grant detail (i.e., vesting schedule and expiration dates) and calculate values including intrinsic (pre-tax), after tax, option/time and forfeiture. It is also important to be able to illustrate the client’s option leverage, concentration percentages and option Insight Ratios.

Providing clients with simple “rules of thumb” regarding their equity compensation isn’t very effective. Advisors need to be able to establish and track diversification criteria based on risks and model multi-year after-tax cash flow strategies. General financial planning software isn’t designed to do this, so the alternatives are using the StockOpter platform or building your own spreadsheets.

WSR: What opportunities are available for financial advisors to serve clients and find new clients through giving advice on equity compensation? What is the “sweet spot” client that is being underserved currently, and how do advisors connect with them?

Dillhoefer: There are approximately 8-9 million equity award recipients at public and private companies. Since most of these people are getting their guidance from the “watercooler,” the opportunity for advisors to engage them and generate fees is tremendous.

Additionally, this market is severely underserved due to a reluctance from most advisors to take the time to develop the knowledge and processes to assist this clientele. The “sweet spot” of this niche isn’t the C-suite. Most of these executives (e.g., CEO, CFO, COO, etc.) are already served by Ayco and the major wirehouses.

The “sweet spot” consists of senior executives (e.g., vice presidents, directors, regional managers, etc.) and key employees (e.g., scientists, engineers, developers, salespeople, etc.). These employees generally receive sizable grants and are easier to engage than the C-suite.

Unfortunately, there is no published list of senior and key employees, so they are harder to identify. However, once onboard, they are likely to move up in their organizations, receive larger awards and continue as a client.

The best way to connect with equity compensation recipients is one at a time and by providing high value guidance. Advisors need just one plan participant who will share the details of their equity awards to start off in this niche. This enables the advisor to understand the company’s program, create an analysis, interpret the findings, make valued recommendations and then ask for referrals.

One of the great things about this niche is that everyone who receives equity compensation knows many others that all have the same need for advice. If you don’t have access to any equity award recipients, I recommend pursuing another niche.

James Miller, Contributing Editor & Research Analyst at Wealth Solutions Report, can be reached at ContributingEd@wealthsolutionsreport.com

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