The Challenge

One of our clients was a senior executive at a publicly traded company. Due to the restricted and common stock he owned because of his employment, he found himself in a very concentrated, and potentially risky position in managing financial assets. Unsure of the best approach to reduce his reliance on this company stock, he felt the need to hire a wealth management advisor to help reduce his exposure. He engaged Morgan Rosel’s investment advisors for assistance in developing a financial investment strategy to diversify his portfolio.

Restricted stock is a common form of equity compensation. There are many rules and regulations that must be followed when trading restricted stock including blackout periods and strict vesting schedules. In addition, restricted stock has nuances with how the government taxes gains which needs to be fully understood to minimize taxation. 

Over the years, we’ve seen people lose millions of dollars because they had too much of their wealth tied up with their employer’s stock. We didn’t want that to happen to our client.

The Solution

As his wealth management advisor, Morgan Rosel carefully analyzed the equity compensation plan alongside his financial plan and risk profile. We ran tax strategy modeling tailored to the complexity of this particular client’s benefits package and needs. During our analysis we considered structuring costless collars (also known as a zero-cost collar) and the purchase of put options in order to protect him in the event this company’s stock took a nose dive.

After careful evaluation of all the various options taken in context with his unique situation, we decided to sell the stock at regular intervals and diversify his portfolio to protect against a major downturn. While this created a taxable event for our client, the long-term benefits outweighed the costs. One of the driving factors in the selection of this strategy was the fact that the state our client lived in was offering zero capital gains tax because our client’s stock was domiciled in his home state, and he held the position for 2 years or longer. Thus, with this info in mind, we worked closely with his accountant to strategically sell the restricted stock to diversify his portfolio, maximize gains, and minimize tax burden.

The Results

Prior to selling restricted stock a detailed financial analysis should be performed. This process takes time, patience, and expertise to maximize the chances of success. We believe the effort in this client’s case was well worth the time spent. The benefits of the reduction in financial risk caused by overexposure to one company helped him to retire comfortably and maintain his lifestyle with less worry.

Having a compensation structure that includes company stock is, oftentimes, significantly riskier than one would think. Consider this; your paycheck is coming from your company, and you have a large equity compensation package at the same place. In addition, many people participate in the company’s ESOP plan which uses their salary to purchase even more stock! In the event something negative happens to the company, you could lose a significant portion of your income, wealth, and savings – all unnecessarily.

It’s important to work with a wealth manager to develop a strategic divesting plan to unwind your equity compensation benefits and diversify your portfolio. Connect with one of our Denver wealth management advisors today to understand how we can help you manage your equity compensation.

The material presented in this case study are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual, of any specific investment strategy, or on any specific security. Further, nothing in this case study should be construed as an endorsement or testimonial of the services provided by Morgan Rosel Wealth Management or any of its Representatives. Morgan Rosel Wealth Management’s investment advisors do not provide tax or accounting advice, for such services speak to a Certified Public Accountant or your tax professional. To determine which investments may be appropriate for you, consult your investment advisors prior to investing. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.

Morgan Rosel Wealth Management are registered investment advisors. Advisory services are only offered to clients or prospective clients where Morgan Rosel Wealth Management and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Morgan Rosel Wealth Management unless a client service agreement is in place.

This commentary reflects the personal opinions, viewpoints and analyses of the MorganRosel Wealth Management, LLC (“MRWM”) employees and guests providing such comments, and should not be regarded as a description of advisory services provided by MRWM or performance returns of any MRWM Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. MRWM manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. MRWM may recommend the services of a third-party attorney, accountant, tax professional, insurance agent, or other specialist to clients. MRWM is not compensated for these referrals.