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Feb 20, 2016

What special considerations do executives face with their own financial planning?

The demands of running a public company do not leave corporate executives much time to ponder their personal balance sheets. They spend so much time at work that they have little energy left to focus on their own financial future—a vital task considering that they are also spouses, parents and the planners of their families’ financial future.

Sustaining the wealth they have built poses unique challenges, as these executives often hold illiquid assets and concentrated positions in the businesses that employ them. The emotional attachment they have to their companies may also present an obstacle to creating a rational plan, since their personal wealth is inextricably linked to those companies’ fortunes.

Indeed, executives and retirees commonly feel distrustful of the general market, yet confident about their own company’s stock, as they had a direct role in ensuring the company’s success. Corporate executives’ investment portfolios therefore may be heavily weighted with employer stock and stock options subject to rules of which they may not be aware. Yet it is important that they understand the risks, as well as the rewards, of employer stock ownership and integrate their corporate benefits with the rest of their wealth plan.

Some corporate executives have enjoyed significant appreciation of stock options and company stock due to incentive-based equity compensation plans. These concentrated stock positions present planning challenges because volatility is significantly higher than with diversified portfolios. It can be devastating to an executive’s personal finances when the stock has an unexpected downturn.

Restricted stock and stock option grants are potentially valuable perks that can go a long way toward increasing financial security. But they are also exceedingly complex.

While employers must detail every aspect of their equity compensation plans, employees are responsible for knowing the oftentimes complex rules. What happens to someone’s equity awards should he or she retire or leave for another employer? If an executive owns performance shares, how does the plan work? What is the payout if performance goals are met—or not met?

Senior executives may be subject to:

  • SEC Rule 144, which governs the sale of control or restricted stock;
  • Section 16 of the Securities Exchange Act, which requires disclosure of any changes in beneficial ownership to the SEC;
  • Insider trading policies, which exist alongside SEC resale regulations. Corporate executives may further be subject to corporate blackout periods when they’re not allowed to sell their company’s stock. At other times, they may hesitate to sell stock for fear of appearing disloyal or triggering signals associated with insider transactions.

It is not unusual for a corporate executive to grow his or her wealth, yet lack an overall wealth management plan.

A comprehensive approach to wealth management, however, employs a client-focused process that integrates an executive’s corporate holdings and benefits with other aspects of his or her financial plan. Integration of corporate benefits with the rest of the overall plan is vital and something often overlooked when executives engage in retirement and estate planning.

In short, executives need to plan and keep planning. If time is a limited commodity, finding competent advisors to assist will be a major advantage.

Kamesh Nagarajan is a Financial Advisor with the Wealth Management division of Morgan Stanley in New York, NY. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, Member SIPC (www.sipc.org). Morgan Stanley Financial Advisor’s engage Worth to feature this profile. Mr. Nagarajan may only transact business in states where he is registered or excluded or exempted from registration (www.morganstanleyfa.com/prandaragroup). Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Mr. Nagarajan is not registered or excluded or exempt from registration. The strategies and/or investments referenced may not be suitable for all investors. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors or Private Wealth Advisors do not provide tax or legal advice. Morgan Stanley Smith Barney LLC offers insurance products in conjunction with its licensed insurance agency affiliates. (CRC1374766 01/16)

This article was originally published in the February/March 2016 issue of Worth.

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