Focusing on a specific niche can be a significant marker of your long-term advisory business success. It allows you to be nimble in serving unique client needs while building a reputable brand for creating solutions for a demographic. Research from CEG Worldwide, an advisor coaching firm, found that 70% of advisors who earn over $1 million annually focus on a particular niche.
We often hear advisors express an interest in working with executive- and C-suite-ranking clients and business leaders, a coveted client base for financial advisors, given their high earning potential, unique planning situations and related opportunities.
To be successful with this group, advisors need to be strategic in their approach and keenly aware of the challenges these clients face in their financial planning measures. Often, their planning begins with an executive compensation package and they will look to their advisors for insight and advice on how to best manage the details. Optimizing the package can be the key to demonstrating value for this client group.
Our team works with executives from major national corporations, and we have helped our clients navigate countless planning scenarios. Here’s our best advice for working with executive clients and helping them optimize their executive compensation plan.
Important Considerations For Executive Clients
Stock Ownership
Stock ownership is only one piece of the puzzle for executives but it can be a significant aspect of overall compensation in many instances. The stock ownership structure can be complex, and oftentimes the executive doesn’t plan for the long-term implications of a package offered 10-15 years before retirement. If the executive is receiving stock options, it can be easy to overlook how that will be realized during retirement. Some companies will vest restricted stock units immediately upon retirement, while others will force executives to surrender outstanding RSUs when they retire or leave the company.
Tax considerations go hand-in-hand with stock options, ultimately determined by whether the executive can afford to purchase and hold the stock or if they need to sell it immediately. If the client sells immediately, they pay short-term capital gains rates. But if they hold it for a year or longer, they are subject to the lower capital gains tax rate. For clients who are charitably inclined and own stock, they may opt to bypass the stock themselves and gift appreciated stock to a selected organization.
Company stock ownership also raises questions around insider information, especially if the executive is a high-ranking official who has access to important and confidential financial information. It is essential to understand both the SEC’s and their company’s rules and regulations around selling company shares. I have worked with clients who were required to hold a certain amount of company stock at all times and with clients who were only permitted to sell during specific open periods. For these individuals, establishing a 10b5-1 plan can be a way to allow them to unload a predetermined number of company shares while protecting them from SEC scrutiny.
With various strategies in play, advisors must understand the clients’ full picture and be positioned to act proactively on their behalf.
Deferred Compensation
Deferred compensation is one of the more well-known aspects of executive compensation packages. While these plans offer some room for strategy, they are generally based on the company’s standard policies. The executive needs to know 1) What their current expenses look like and 2) how much money they need to maintain their lifestyle in retirement. If they are able to defer some income, they could be able to save on taxes. What’s more, is some companies offer matching or contribution benefits for executives who elect to defer. When an executive is deferring compensation, they may have to decide their deferral timeline, be it five or 10 years or electing a lump sum payout. This decision is largely based on taxes and the anticipated tax rate in retirement.
One important consideration for deferred compensation planning is where the client plans to establish residence in their retirement years. Consider: does their current or future home state collect state income taxes? I worked with a Texas-based client who planned to relocate to California upon retirement. He was able to choose his deferred compensation timeline, and we determined it was best for him to take the lump sum while he was still living in Texas, therefore avoiding the 12% tax that California would assess on the income. If he were to receive gradual payouts while living in California, he would be paying taxes from the highest bracket, plus subject to the 12% extra income tax for residents and significantly eroding his earnings.
Health-Care Considerations
Advisors must always be proactive in planning for health-care expenses in retirement, but this becomes a much larger need for those retiring early, as can often be the case with executives.
Consider an executive who retires at age 60, ready to enjoy a comfortable retirement lifestyle, only to realize his family’s health-care plans have not been adequately considered. He is facing a five-year gap—and a significant dollar spend—before Medicare benefits are available. The executive and his spouse could easily spend well over $100,000 on health insurance in that time period and considering health insurance costs outpace inflation, it is easy for retirees to spend significant portions of retirement savings on health care.