Focusing on a specific niche can be a significant marker of your long-term advisory business success, allowing you to be nimble in serving unique client needs while building a reputable brand. 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 the related opportunities.
To be successful with this group, advisors need to be strategic in their approach and keenly aware of the financial planning challenges this group faces. Often, their planning begins with an executive compensation package, and exeutives and C-Suite clients look to their advisors for insight and advice on how to best manage the details. Optimizing the package can be 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 plans:
Four Important Considerations for Executive Clients
Stock ownership is 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 often the executive doesn’t plan for the long-term implications of a package offered 10 to 15 years before retirement. If the executive is receiving stock options, it can be easy to overlook how they will be realized during retirement. Some companies will vest restricted stock units (RSUs) immediately upon retirement, while others will force executives to surrender outstanding RSUs when they retire or leave the company.
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Tax considerations go hand in hand with stock options and are ultimately determined by whether the executives can afford to purchase and hold the stock or if they need to sell it immediately. If clients sell immediately, they pay short-term capital gains rates. But if they hold for a year or longer, they are subject to the lower capital gains tax rate. Clients who are charitably inclined 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 their client’s specific situation and be positioned to act proactively on his or her behalf.
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. Executives need to know what their current expenses look like and how much money they need to maintain their lifestyle in retirement. If they are able to defer some income, they may be able to save on taxes. What’s more, some companies offer matching or contribution benefits for executives who elect to defer. When executives are deferring compensation, they may have to decide their deferral timeline, which could be spread over five or 10 years or be a lump sum payout. This decision is largely based on taxes and anticipated tax rate in retirement.
One important consideration for deferred compensation planning is where the client plans to establish residence in their retirement years. You will need to consider the state income tax rate of their current or future home state. I worked with a Texas-based client who planned to relocate to California upon retirement and he was able to choose his deferred compensation timeline. 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 pay taxes from the highest bracket, be subject to the 12% extra income tax for residents and significantly erode his earnings.
Advisors must always be proactive in planning for healthcare 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 and is ready to enjoy a comfortable retirement lifestyle, only to realize his family’s healthcare 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, Since health insurance costs outpace inflation, it is easy for retirees to spend significant portions of retirement savings on health care.
“Sometimes executives are able to negotiate retirement healthcare benefits or a related stipend into their compensation packages, which is a significant advantage from a planning perspective.”
Sometimes executives are able to negotiate retirement healthcare benefits or a related stipend into their compensation packages, which is a significant advantage from a planning perspective. For those who find themselves without adequate healthcare coverage, their options can be limited. Depending on how retirement assets are structured, sometimes your client can secure tax advantages or less expensive health insurance. As their advisor, you can help design a strategy to cover the expenses and minimize the impact on their larger retirement savings.
Taxes play a role in every single decision you make for a client. For executive clients, tax strategy becomes an even larger component in the planning process. Tax implications come down to whether clients want to pay taxes now or later, specifically whether they will be in a higher tax bracket in the future.
As with all clients, advisors are forced to make educated guesses as to how the tax picture may evolve as political administrations change hands. It is up to you to have the right conversations with clients and ensure they see the full tax picture now and well into the future.
The Takeaways for Your Practice
Advisors who continually show their value and go above and beyond will be the most successful — and their clients will be too. In summary, here are the top takeaways for advisors who work with or wish to work with executive clients:
1. Perform scenario-based planning to make an impact.
Executive compensation packages are complex, making it difficult to understand the short- and long-term implications of certain decisions. As the advisor, it’s important that you work closely with your executive clients to understand the full benefits offered and perform scenario-based planning to demonstrate how minor details can make a major impact.
2. Understand where you can and cannot help them negotiate their package.
While certain details, like stock ownership structure and offerings, are fairly straightforward, there are certain aspects that can be negotiated to best position your clients for the future. In our experience, executive clients have the opportunity to negotiate more as they get closer to retirement when they can make decisions like when to vest or whether health insurance is fully paid or via a stipend. Take advantage of these opportunities to optimize the plan.
3. Align with your client’s other professional partners.
Creating strategic partnerships with your client’s network of professional partners is essential to his or her long-term success. For example, working closely with the client’s CPA ensures a strong line of communication and minimizes tax implications for the client. These relationships help maintain a comprehensive view and strategic approach.
4. Inspire your clients to act.
A financial plan is only as good as the paper it is written on if there is no action on its components. Leave no stone unturned when assessing your executive client’s financial picture and strive to think outside the box with your planning strategies. Executives have complex financial concerns that require creative and actionable planning strategies to optimize their wealth. If clients and advisors don’t work together to take action on the recommendations, planning is a fruitless effort.
If you hold yourself out as a financial planner, you must be willing to take a holistic approach with your clients. Advisors will often defer to investments as the starting point in a relationship but real value is shown when you demonstrate to a prospect that you understand their situation, needs and goals. Executive clients in particular are seeking comprehensive planning. Being responsive and integrating them into your service model quickly and efficiently will help you win their business.
Zac Beckerley, CFP, is a wealth manager for Merit Financial Advisors focusing on investment growth and income strategies through comprehensive financial planning. He enjoys helping clients build and pursue their financial goals for a comfortable and exciting retirement. Zac received both his bachelor’s and master’s degrees from Texas Tech University. He has always enjoyed numbers, so it was a good fit for him to earn a degree in financial planning. He likes to play and listen to music, as well as spend time with his wife and three children.