Strategies to Maximize Executive Compensation

In the parable of the two business executives, I reveal 3 strategies to maximize wealth with employer benefits.

Podcast Details:

Podcast Title:  Strategies to Maximize Executive Compensation
Podcast Series: Financial Literacy Boot Camp
(Video and illustrations available on our YouTube channel here.)

Powerpoint Slides

In my previous positions and just through a lot of reading on executive compensation, we’ve developed an expertise.  So any of you listening out there that have executive compensation like RSUs, restricted stock, NSOs or ISOs, you want to give us a call so we can evaluate whether not you are maximizing your wealth potential and saving yourself money in tax liability.  Today, I’m going to share a little parable that gives a high-level overview of how we help our clients.

In previous articles, we’ve have mentioned the importance of having a specific strategy to maximize your wealth building potential through executive compensation program.  In our practice, we notice many highly-skilled and hard-working professionals don’t maximize their executive compensation programs either due to lack of knowledge or lack of time.  This article will focus on some of the strategies that can be utilized in order to not incur unnecessarily high taxable income in any given year that awards are given, exercised or vested.  To illustrate a specific strategy we will use the parable of Ron Smith.

 

The Parable of the Two Business Executives (6:00)
Ron Smith is the vice president of sales for MegaPharma, Inc. a thriving pharmaceutical company based in the US.  Ron has been with the company for nearly fifteen years and has experienced great success.  Such success he is now contemplating hiring a financial professional to help him manage his finances.  Before this time he had managed pretty well he thought, at least according to his peers, but the events of the past six months have caught his attention.  About seven months ago, his close friend and fellow colleague, Bruce Davis, who works for AlphaBioTech was laid off after serving his company for ten consecutive years.  That was bad news indeed, but Bruce was a great saver and his wife works also so they would be fine financially.  The real problem was what Bruce shared with Ron during a pharma conference they attended together.

 

Ron’s Situation(10:15)
Several weeks go by and Ron meets with Bruce’s financial advisor.  The financial advisor uncovers several things.
Ron has 4 wealth building tools that are offered to create retirement income:
  1. Defined Contribution Profit Sharing Plan or “401(k)”; The company matches up to 6% dollar for dollar (see episode 42)
  2. Defined Benefit Cash Balance Pension Plan; The company contributes 7% of Ron’s salary to the plan annually
  3. Restricted Stock Units; These have a 3-year vesting schedule
  4. Non-Qualified Stock Options; These have a 3-year vesting schedule and 10-year expiry
Observations (16:00)
  • The Advisor has also noticed a high concentration in MegaPharma’s stock across these 4 accounts
  • Ron is currently in the 33% tax bracket and concerned with his new salary and bonus he will be in the highest bracket of 39.6%
Three Planning Strategies (17:22)
After review, the financial advisor advised Ron to employ these three strategies to help Ron.
1) He recommended that Ron avoids exercising his options until after he had earned enough income year-to-date to avoid paying social security taxes and thereby reducing his take home pay.  This will put 6.2% back into his pocket.
2) After creating a schedule of all Ron’s RSUs and NSOs, an exercise schedule was created to incorporate a system to “average-out” selling company shares to diversify his retirement portfolio.  This minimized taxes while taking into consideration historical company share performance, Ron’s risk tolerance, and his financial goals.
3) Transfer property out of his estate by donating to a charity and use the subsequent tax deduction received to offset some of the W-2 income tax generated at exercise.

 

Addidtional Resources:

 

#executivecompensation #restrictedstock #stockoptions #taxsavings #retirementplanning #finlit #finance #financialadvisor #money #financialtips #financialadvice

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About Me:
Dominique Henderson, CFP® is founder of DJH Capital Management, LLC., a fee-only, registered investment advisory firm specializing in comprehensive financial planning and wealth management.

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What Do You Need to Know Before Working with a Financial Planner?

As an industry insider and one that has a concern for those that consume financial services, there are things you should know before working with a financial planner/advisor/professional. This episode will teach you what you need to know.

Podcast Details:

Podcast Title:  What Do You Need to Know Before Working with  a Financial Planner?
Podcast Series: Financial Literacy Boot Camp
(Video and illustrations available on our YouTube channel here.)

I really wanted to use this show as a way to update my article:  “Five Tips to Consider Before Choosing an Advisor”.  As an industry insider and one that has a concern for those that consume financial services, there are things you should know before working with a financial planner/advisor/professional.

Some of this has been covered previously through the above-referenced article and Episode 10-“Putting the Serve Back into Financial Services”, however, after recently giving a talk at a conference about this subject I felt I should update “the list”.

Questions/Issues We’ll Address on this Episode:

The 5 Areas of Greatest Concern:

Experience (Qualfications, Education, Specialty, Etc.) – (7:47)

Let’s talk experience.  Now I covered in a previous episode (“The Low Down on Financial Advisor Credentials”) some of the more popular professional designations.  I’m going to stick with what I’ve said before that you want someone that has been working with clients for at least 5 years especially if they have their own firm.  If it is a larger firm obviously the collective experience will probably exceed that.  But you may also want to look for a specific expertise.  What is your particular pain point?  Why do you want their help?  Ask them specifically how they have helped people in your shoes.  This will get them talking about their experience and their service offering which should give you some answers

Fiduciary Role (Ethics, Conflicts of Interest, Etc.) -(12:55)

I think the first and foremost is making sure your advisor is a fiduciary.  I actually spoke with a prospective client the other day and he actually referenced this term.  He asked about my pay structure and how I’m compensated.  I applauded his level of knowledge because most individuals working with an advisor don’t even know how their advisor is paid.  And if you don’t know how they’re paid you don’t know if his or hers interest are aligned with yours.  So make sure they adhere to a fiduciary standard and are looking to serve client interests before their own.

Method of Compensation (commission-based  vs fee-based) -(15:00)

Question them about their methods of compensation.  I’ve covered this before in episode 24 ” The ABCs of Financial Advisor Compensation”.  Does your advisor receive commissions as compensation by the selling of products to you?  If so, ask them what method they use to choose certain products and the incentive pay from the advice they give.  Other advisors may be compensated via some type of fee structure which can be fee-based or fee-only.  These are questions you should ask and have the advisor explain to you.

 

Method of Service Delivery (financial plan, IPS) – (18:45)
Next point is to have an investment policy statement (IPS for short).  But I want to expand that by saying that you should start with a financial plan.  A lot of people don’t agree with me here but anything that you do successfully in life usually starts with a plan, so why not your finances? When you focus only on investments how is the rest of your wealth to be managed?  What about tax planning?  Risk management?  Estate planning?  In sitting down with a financial planner, you should be focused on them taking a comprehensive view of your situation.

 

The “Sniff” Test – (21:25)
Passing the “sniff” test is another point I want to bring up.  I believe gone are the days where the advisor holds hostage all the information from the prospective client.  Especially if this leads to intimidation.  Nowadays, clients are looking for a collaborative experience and that means a sharing of information.  So if you are sitting with someone that does not seem they espouse that philosophy, you may want to keep looking.

 

#taxsavings #retirementplanning #finlit #finance #financialadvisor #money #financialtips #financialadvice

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About Me:
Dominique Henderson, CFP® is founder of DJH Capital Management, LLC., a fee-only, registered investment advisory firm specializing in comprehensive financial planning and wealth management.

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The Low-Down on Financial Advisor Credentials

Which one should I work with? Which designation is “better”? What are the qualifications to become one? How are they regulated?

Podcast Details:

Podcast Title:  The Low-Down on Financial Advisor Credentials
Podcast Series: Financial Literacy Boot Camp
Video and illustrations available on our YouTube channel here.

Powerpoint Slides

Questions/Issues We’ll Address on this Episode:

How many financial advisors are there?  (5:15)

Per the BLS there are 249,400 (in 2014) of “financial advisors”.

How many financial advisors are there?  (7:20)

Natural Questions….Which one should I work with? Which designation is “better”? What are the qualifications to become one? How are they regulated?

Top Down View on Advisors and their Specialty (8:15)
What is a CFP and what are the requirements? (9:35)
What is CFA and what are the requirements? (16:12)
What is CPA and what are the requirements? (20:35
Other designations (23:10)

Other Resources:

FINRA website for designation comparison
Episode 24 on Advisor Compensation
Episode 22 on What to Look for in an Advisor
5 Tips Before Hiring a Financial Advisor
10 Questions to Ask Your Financial Advisor

#financialliteracy #finlit #finance #financialplanning #financialeducation #advice #financialadvisor #financialliteracy #money #finances #financialplanner #cfp #cfa #cpa

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Sign up for more our free newsletter with financial updates like these!

Subscribe to the podcast!

About Me:
Dominique Henderson, CFP® is founder of DJH Capital Management, LLC., a fee-only, registered investment advisory firm specializing in comprehensive financial planning and wealth management.

 

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