Holding a significant amount of company stock can create both tax and risk management considerations. Understanding how much of your net worth is tied to one company and how it impacts your long-term goals is an important part of the financial planning process.
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AJ, it’s not uncommon for us to meet a new client who owns a substantial portion via options or RSUs in their company and is stuck. Is it going to keep going up, or is it going to crash, or are they going to have to pay a bunch of taxes right now? What should they do?
Yeah, it’s a good question. It’s a good problem to have, a problem nonetheless. But I think as advisors, the first thing that you need to clarify is, ultimately, what does the client want to do with the stock? If it’s something that they’re keen to continue to hold, do they want downside protection? Are you trying to hedge it? Are you trying to generate income off of it and diversify the income stream? If the client wants to sell it, you need to be mindful of taxes. So that’s where you’re getting into things like maybe it’s variable prepaid forwards or enhanced indexing or an exchange replication fund. There’s lots of different options for this, but again, tying it back to the financial plan, you have to, you have to be mindful of how much of my net worth is tied up in this one stock, how much of my retirement is predicated or dictated by the success of one stock or one company. And you have to model out the worst-case scenario responsibly.
If the stock gets cut in half by 50% or 70% and then compounds at five or six for the duration of your holding period, can you still sustain or fund your long-term goals? So, it’s a two-pronged question.
You have to manage this from a tax perspective, and then you also have to manage it from a risk management perspective. So there are options for helping our clients manage concentrated stock while being mindful of their long-term goals and financial plan.