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

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.

Sound bumps provided by www.bensound.com

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

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.

Sound bumps provided by www.bensound.com

Create Tax Free Income for Life with Municipal Bonds

Now that you’ve read the somewhat salacious title of this article, the real question becomes “is there any truth to it”? A second question might be similarly, “what’s the catch”? Well, I hate to disappoint you but there is no catch and it is possible to create a tax-free income stream for life. But how? It is done with an asset that has been around for literally ages—bonds.

 

Now that you’ve read the somewhat salacious title of this article, the real question becomes “is there any truth to it”?  A second question might be similarly, “what’s the catch”?  Well, I hate to disappoint you but there is no catch and it is possible to create a tax free income stream for life.  But how?  It is done with an asset that has been around for literally ages—bonds.

In particular, this strategy can be executed successfully by using tax-free, non-AMT municipal bonds (what is a AMT bond?).  Most investors shy away from bonds because they yield (or return) less than equities and tend to be more complex in nature.  However, the global bond market is larger than the global equity market by $30 Trillion (see here) although the portion we will discuss in this article is much smaller at just shy of $4 trillion.  So, why might you want to invest in municipal bonds to create tax free income for life?

What Are Municipal Bonds

First, municipal bonds represent an “I.O.U” issued by a governmental entity—usually state or local.  They get their “tax-free” status because the money raised by the bond issue is usually for a “public good or service” like schools or roads.  Money raised for these type of bonds are labeled as “general obligation” bonds and are backed by the full, faith and credit of the issuing entity’s taxing power.  Generally speaking, the more taxing power, the better the backing.  The idea behind tax-free interest from the bondholder comes from the fact that many schools and roads are usually funded by a large portion of taxpayer dollars.  Thus, tax-exempt interest was born to incentivize the public to keep paying their taxes to fund projects.  Ok, seems like a good deal, so why not use bonds in 100% of your investment portfolio?

There’s Still No Free Lunch

Well, like it’s been said before “there is no free lunch” and it is no different for municipal bonds. The rules of asset diversification apply even in the compelling case of tax-free income.  Bonds have historically had little correlation to equities except in market crises situations, so creating a portfolio of both equities and bonds makes a whole lot of sense as a long-term investor.  But when considering other fixed income vehicles like annuities or real estate which both generate taxable portfolio interest, individual municipal bonds make a good alternative.  Take the case with your typical annuity (fixed or variable) that carries an average 2-3% annual expense charge when you consider:  administrative, mortality and expense, mutual fund costs.  And although you may not see it, don’t forget there will be a commission paid to the broker that sold you the annuity.  So first year charges, can easily exceed 8%.  Finally, you still have to pay taxes on the annuity income stream on all gains beyond your cost basis.  Alternatively, you can invest the same amount into a diversified municipal bond portfolio and pay no taxes and receive tax free income until the bonds are called or mature.  As an added bonus, your estate will receive a “step-up” in basis at your date of death greatly reducing any potential capital gains.

Why Not Use a Bond Fund?

This is a good question, and the short answer is that individual bonds are actually cheaper and a much more effective way of achieving “tax-free income”.  Similar to annuities (mentioned above), bond funds have both explicit and implicit expenses.  The explicit expenses like marketing, administrative, sales loads, etc. show up in the annual expense ratio.  Granted, you can find a really low-cost index fund, but like actively managed funds, they have implicit costs which are not in the annual expense ratio.  For example, what happens when the fund manager receives new capital in the fund and is compelled to buy bonds in an expensive market, or alternatively faced with selling bonds into a cheap market.  This is referred to as liquidity premium (the former) or discount (the latter).  There is also “cash-drag” where the fund manager may hold extra cash just to satisfy “potential” fund redemptions.  Being a former portfolio manager myself, I realize not all bond fund managers effectively navigate these risks which translate in lower returns to fund investors.

“Buy and Hold”

Not the sexiest, but the “buy and hold” strategy for individual municipal bonds is by far the smartest.  Here’s a brief example of the power of compounding in this article.  Not only do you save the costs and expenses mentioned above, you also greatly reduce many of the risks that run off several other investors thereby creating a golden opportunity for the patient and savvy investor.

Check out these resources:

P.S. I apologize for the infrequency of written posts to my readers.  I’ve used the extra time to work on a book that I hope to have finished later this year.  Until then, enjoy the podcasts and these sporadicly written posts!

 

FLBC 028: The New President and Policy Implication

If you disregarded or questioned his influence, just follow him on Twitter. His latest set of tweets had Ford re-thinking their decision to outsource jobs to Mexico and instead consider Michigan. What do the next four or eight years hold for us? Time will tell, but it can be fun to speculate…

Podcast Details:

Podcast Title:  The New President and Policy Implication
Podcast Series: Financial Literacy Boot Camp
Video and illustrations available on our YouTube channel here.

 

Questions/Issues We’ll Address on this Episode:
We’ll look at 3 aspects of the new POTUS and policy implications:
– Economy and GDP
– Tax Reform
– Healthcare Reform

Helpful Links:

Submit a “Boot Camp Listener” question

Sign up for more 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.

Where to Find Us:

Facebook-Icon78-3 twitter-icon youtube google
#FinancialLiteracyBootCamp

© 2017 DJH Capital Management, LLC.

Sound bumps provided by www.bensound.com

FLBC 026: The Fundamentals of Investing

Podcast Details:

Podcast Title:  The Fundamentals of Investing
Podcast Series: Financial Literacy Boot Camp
Full Illustrations available on YouTube Version here.

 

Questions/Issues We’ll Address on this Episode:

1) Review of 2016 Investment Performances
2) What is an asset class? How big are they? Which should l choose?
3) How to track your portfolio if you are managing it.

Helpful Links:

Link to 2016 Asset Class Performance

 

Submit a “Boot Camp Listener” question

Sign up for more updates like these

Where to Find Us:

Website
Blog
LinkedIn
Facebook
Twitter

#FinancialLiteracyBootCamp

Bio:

Dominique is owner of DJH Capital Management, LLC. a full service, comprehensive financial planning firm helping individuals build roadmaps to reach their financial dreams.

© 2017 DJH Capital Management, LLC.

Sound bumps provided by www.bensound.com

FLBC 025: Protecting, Maintaining and Enhancing Your Credit

Podcast Details:

Podcast Title:  Protecting, Maintaining and Enhancing Your Credit
Podcast Series: Financial Literacy Boot Camp
Full Illustrations available on YouTube Version here.

 

Questions/Issues We’ll Address on this Episode:

Protecting –Understand the FCRA.  This allows you free access to your credit reports to check the details.

Maintaining – Get identity theft protection and look at it as an insurance product.

Enhancing – You have to know the formula.  YOu also have to understand what the formula is designed to portray or illustrate.  The Formula – 35% payment history; 30% amount owed; 15% length of history; 10% type of credit accts; 10% new accounts.  The Formula’s purpose is to convey how well you borrow and pay back money.  So if you are a cash buyer and don’t believe in debt then your FICO score will likely be low.  It doesn’t reflect your level of income to debt or assets–so don’t look at it that way.

Helpful Links:

Blog Article on Credit

NumberSense by Kaiser Fung

Check your credit report for free

PIRG Report

Submit a “Boot Camp Listener” question

Sign up for more updates like these

Where to Find Us:

Website
Blog
LinkedIn
Facebook
Twitter

#FinancialLiteracyBootCamp

Bio:

Dominique is owner of DJH Capital Management, LLC. a full service, comprehensive financial planning firm helping individuals build roadmaps to reach their financial dreams.

© 2017 DJH Capital Management, LLC.

Sound bumps provided by www.bensound.com

FLBC 024: ABCs of Financial Advisor Compensation

Podcast Details:

Podcast Title:  ABCs of Financial Advisor Compensation
Podcast Series: Financial Literacy Boot Camp

Full Illustrations available on YouTube Version here.

Questions/Issues We’ll Address on this Episode:

-We break down how financial advisors are compensated;
-Compensation transparency (difference between suitability and fiduciary standard); and
-What is best for you

Helpful Links:

Submit a “Boot Camp Listener” question

Sign up for more updates like these

Where to Find Us:

Website
Blog
LinkedIn
Facebook
Twitter

#FinancialLiteracyBootCamp

Bio:

Dominique is owner of DJH Capital Management, LLC. a full service, comprehensive financial planning firm helping individuals build roadmaps to reach their financial dreams.

© 2017 DJH Capital Management, LLC.

Sound bumps provided by www.bensound.com

FLBC 023: The Question Bonanza – Part 2

I continue to tackle questions from the investing public.

Podcast Details:

Podcast Title:  The Question Bonanza – Part 2
Podcast Series: Financial Literacy Boot Camp

Full Illustrations available on YouTube Version here.

Questions/Issues We’ll Address on this Episode:

I tackle investor questions.

– How should I construct my portfolio? (for DIY investors)

– What do I need in my estate plan?

– Should I contribute to my HSA or not?

Helpful Links:

Submit a “Boot Camp Listener” question

Where to Find Us:

Website
Blog
LinkedIn
Facebook
Twitter #FinancialLiteracyBootCamp

Bio:

Dominique is owner of DJH Capital Management, LLC. a full service, comprehensive financial planning firm helping individuals build roadmaps to reach their financial dreams.

© 2016 DJH Capital Management, LLC.

Sound bumps provided by www.bensound.com

FLBC 022: The Question Bonanza – Part 1

I tackle questions from clients, listeners and the general public.

Podcast Details:

Podcast Title:  The Question Bonanza – Part 1
Podcast Series: Financial Literacy Boot Camp

Full Illustrations available on YouTube Version here.

Questions/Issues We’ll Address on this Episode:

I tackle investor questions.

– What type of insurance should I have?

The Building Blocks of a Financial Plan – Part 1

The Building Blocks of a Financial Plan – Part 2
– What should I look for in a financial advisor?

References:

FINRA: https://brokercheck.finra.org/
SEC: https://adviserinfo.sec.gov/
CFP Board: http://www.letsmakeaplan.org/

– How much should I invest in the market?

Helpful Links:

Submit a “Boot Camp Listener” question

Where to Find Us:

Website
Blog
LinkedIn
Facebook
Twitter #FinancialLiteracyBootCamp

Bio:

Dominique is owner of DJH Capital Management, LLC. a full service, comprehensive financial planning firm helping individuals build roadmaps to reach their financial dreams.

© 2016 DJH Capital Management, LLC.

Sound bumps provided by www.bensound.com

FLBC 021: The Year End Planning Guide – Part 3

Want to know what actions to take for your investments, tax, and estate plan?

Podcast Details:

Podcast Title:  Year End Planning Guide- Part 3
Podcast Series: Financial Literacy Boot Camp

Full Illustrations available on YouTube Version here.

Questions/Issues We’ll Address on this Episode:

-The most common ways to estate plan, and
-Why you would (or would not) create a trust for your assets

Helpful Links:

Click here for our Year-End Tax Planning Guide.

Submit a “Boot Camp Listener” question

Sign up for more updates like these

Where to Find Us:

Website
Blog
LinkedIn
Facebook
Twitter

#FinancialLiteracyBootCamp

Bio:

Dominique is owner of DJH Capital Management, LLC. a full service, comprehensive financial planning firm helping individuals build roadmaps to reach their financial dreams.

© 2016 DJH Capital Management, LLC.

Sound bumps provided by www.bensound.com