From the December 2006 issue of Wealth Manager Web • Subscribe!

High Flyers

At the pinnacle of the corporate structure is the C-level: CEOs, CFOs, CIOs, COOs, to name a few. As a group, they tend to be highly compensated, hard-working executives who are all at the top of their game. But don't make the mistake of thinking they're all the same. Many are comfortable delegating responsibility to trusted advisors while others are micro-managers, unwilling to cede control. Some are serious about organizing what are typically complicated family financial affairs, while others are more focused on corporate than personal finance. But no matter how they work, senior corporate executives can make rewarding--in every sense of the word--clients.

You might expect this to be the case, considering their sophisticated needs--and their annual income. According to, published by the Wall Street Journal, the median annual total cash compensation of CEOs (base salary and annual incentive) tops $1.8 million. For CFOs it is $832,500 and for chief legal counsels it is $651,600. Respondents to the survey included 242 U.S. corporations, most with annual revenues between $5 billion and $10 billion.

These senior executives "tend to be a little more demanding than the average client," says Gary Schatsky, a fee-only advisor and attorney in New York and a former chairman of NAPFA. "But 20 times more wealth does not necessarily mean 20 times more work. You are well compensated" for your efforts.

Senior executives may have varying psychological profiles, but advisors who work with them agree that a common thread--and the most basic concern--is too much company stock. These golden handcuffs, in the form of both immediate and deferred compensation, are specifically designed to tie them to the company. Worse, says CFP Cheryl Burbano of Ameriprise Financial in Wesley Chapel, Fla., many of these executives feel that "if they divest themselves of company stock, they are somehow being disloyal."

So your number one task is to convince these clients to diversify their holdings. Doing so takes a two-pronged effort: First, overcoming emotional resistance and then presenting specific practical strategies for diversification. The "too many eggs in one basket" argument may resonate, especially since the Enron debacle, but executives may in fact be locked in by a combination of company rules and SEC regulations. According to CFP Glenn Kautt of The Monitor Group in McLean, Va., those at the Board level or in senior management can be restricted by insider trading rules, and advisors "need to be sensitized" to these restrictions. In fact, he continues, advisors may have to track down the information when executives don't know company policy.

Within these limits, there are strategies that can be helpful. But Kautt cautions that "strategies that look good on paper often don't look good in reality." An example is holding on to incentive stock options (ISOs) for more than a year in order to avoid ordinary income tax on the sale. This popular strategy, Kautt notes, can "go by the board, if the executive is unwilling to take a huge risk in terms of the stock price." In fact, a downturn in the share price "may outweigh any potential tax savings." The strategy is further complicated by the fact that the alternative minimum tax (AMT) is calculated at the time of exercise and not at the time of sale. If the share price falls during the year the options are held to avoid ordinary income tax on the sale, the net gain may be less than if the executive had sold the shares on the day of exercise.

In many ISO programs, executives can turn in old shares and use the proceeds to acquire new shares in a tax-free exchange, says Patricia Powell of the Powell Financial Group in Martinsville, N.J. That's the good news. The accompanying bad news is that clients accumulate huge positions in company stock and don't want to sell because of the tax consequences.

If it's not possible to sell out, and clients are willing to shoulder the expense, Kautt may turn to straddle techniques such as collars "to insure against the forward volatility of the portfolio and reduce risk." When a client holds both ISOs and nonqualified stock options, Powell may recommend holding on to the ISO shares while exercising and selling the nonqualified shares, using the proceeds to diversify assets away from the company.

Some clients refuse to exercise their options at all, even when doing so is the only way to diversify a concentrated portfolio. John Hill, CEO of Pinnacle Advisory Group in Columbia, Md., describes a client who held three different tranches of options in an aggressive high-tech company back in the boom days. The client refused to diversify his portfolio for the better part of eight months, finally exercising one tranche only when Hill threatened to discontinue the relationship. "Post-2003," Hill notes, "the only value he had in his entire portfolio were the options we exercised. Everything else went down the tubes,"--a story the advisor tells to other executives reluctant to diversify. The client, meanwhile, was grateful for Hill's persistence.

These clients can--and should--be urged to avoid purchasing additional company stock in their qualified retirement plans, a doubly important strategy if the company provides its matching contributions, as many do, in the form of company stock. One of Burbano's clients agreed to shed some of the concentrated position in her 401(k) plan, only to find that the plan governing documents stipulated that no divestiture was allowed until the employee reached age 55, and even then, just half of the company stock could be sold. Only when she reached age 62 could all of the shares be sold. Meanwhile, Burbano told the client not to put any more of her own money into company stock.

Another way to diversify when contributions to qualified plans are maxed out, as they often are for senior executives, is through an annuity purchased with after-tax dollars. Another possibility favored by some advisors is a multimillion-dollar variable life insurance policy.

Issue number two, in Schatsky's view, is "putting some sort of cohesiveness behind personal finance decisions made over a lifetime." Like other clients, executives often have no idea why they acquired specific investments, insurance policies or annuities--although because of their stratified incomes, they may hold more separate items than the average client. A careful review can convince them to shed some of those investments where appropriate.

Other issues arise when executives retire or move on to new positions. For senior executives, "Exiting is not run-of-the-mill retirement," Schatsky points out. In addition to the cash-flow analysis that every retiree needs, there is also a "run for the door to monetize staggering sums of money focused on one company."

As they leave one position for another, C-level clients may be too busy to give the matter much thought, but it can be a big mistake to leave qualified retirement assets with the former employer. Investment options are typically limited once an employee leaves the company. Worse, Burbano notes, the client's spouse is the automatic beneficiary under ERISA-governed plans unless he or she agrees to a change. Rolling the funds into an IRA allows the client to select his or her own investments and to select primary and secondary beneficiaries such as children and grandchildren.

When moving to a rollover IRA, however, clients holding large amounts of appreciated company stock may want to consider taking that stock out of the qualified plan and placing it in a nonqualified brokerage account. Doing this takes advantage of IRS rules concerning net unrealized appreciation (NUA). Instead of paying ordinary income tax on these shares at the time of distribution, the client will be taxed at the preferable capital gains rate. Better yet, the tax applies only to the cost basis, defined as the value of the shares at the time they went into the 401(k) or similar plan.

When it comes to deferred compensation in general, the most important message you can give your clients is that there are no guarantees. Unfunded promises to pay are only as good as the company making them. When a company is acquired, the buyer is under no obligation to honor those promises.

Business as Usual?

The first question Powell asks new executive clients, including CEOs, is, "How secure is your job?" As she points out, "They know when they are at risk. They don't get blindsided because they know what's going on." Even if clients are staying put, and the company is stable, advisors who make a point of understanding all of the compensation arrangements available to their clients can help them manage timing and tax issues.

Like other clients, senior executives often seek financial advice for the first time when they face a business or personal transition. Looming retirement, with its liquidity issues, is a traumatic turning point for many. Hill finds it "fascinating" that "the trepidation, the concerns of a retiring CEO are no different than anyone else's." No matter how big the nest egg, when a customary income stream comes to an end, it's an emotional experience. The advisor's job, then, is to reposition the portfolio to generate income. Executives, like anyone else, don't want to lose what they have.

Other transitions that can prompt a visit to a financial advisor include coming into a sizable inheritance or watching your company go public. A second marriage and late-in-life children produce another set of concerns. Whatever the triggering event, the end result should be a comprehensive financial plan.

Because the laws concerning estate taxes are changing so rapidly, comprehensive planning always includes an estate plan. "Our average client has about $5 million," says Kautt, "and half of them don't even have wills, or they have 20-year-old wills that are outmoded. We put all clients with more than $1 million of investable assets through an estate plan analysis." Any estate plan drawn up before 2000 is out-of-date, he continues, because of new federal regulations concerning advance medical directives and health care proxies. If the language in older documents is not in conformance with federal statutes, the documents won't work when they are needed.

Kautt also suggests that most clients should have revocable trusts, not so much as a way to avoid probate (which they do), but as a management tool. His own family provides a vivid illustration. Both parents were the trustees of a living trust and managed their own affairs until his father became incapacitated--first by strokes and then by Alzheimer's--and his mother died. Without the revocable trust, the money would have wound up with a court-appointed conservator or guardian. Instead, because the eldest son was a contingent trustee, he could manage the money after his mother's death. When he died, Kautt, as the next contingent trustee, could step in with no problems. "Without the trust," he says, "it would have been a mess."

Life and disability income insurance are also part of the mix. In fact, "Disability income coverage is never adequate at the really high income levels," says Aviva Sapers, CLU, ChFC, and CEO of Sapers & Walleck, a benefits and asset management firm in Cambridge, Mass. Executives often have high fixed costs, difficult to maintain if they should become disabled. And many executives, like clients at any income level, spend everything they earn.

High income is not necessarily synonymous with high net worth when clients live up to every penny of their income. Neil Elmouchi, ChFC, of Summit Financial Consultants in Westlake Village, Calif., calls it a difference between being wealthy and affluent. With the affluent, you "see the trappings of wealth, but they are highly leveraged," to the point where clients "hope that year-end bonuses will cover taxes." Elmouchi sees this as a peculiarly California phenomenon, where costs are high and, "The more affluent you are, the more you feel you need to show success." But advisors everywhere can testify that geographic location doesn't dictate the "need" for expensive houses, private schools and country club memberships.

If all of these issues sound familiar, it's because working with senior executives is much like working with any client, once you add more zeroes to their annual income and (in many cases) their net worth. But there are some differences. "Most clients have a better sense of subjectively knowing what's right for them, and advisors typically have a slightly better edge on objective analysis," Schatsky notes. But high-level corporate executives have their hands around technical aspects of multi-million- or multi-billion-dollar deals and are not used to ceding much decision making beyond their own desks. "On the other hand, some are "well-versed in delegating to top level people who have their trust, who will analyze and make recommendations and then implement those recommendations," Schatsky adds.

Special Needs

Either way, their plates are full, and these clients have little patience listening to long explanations or extensive menus of options. They want meetings to be quick, and they want the big picture. As Elmouchi recalls, "When I first started working with high-net-worth individuals, I gave them a lot of options. That stopped when, one day, a client said to me, 'I don't want to know all these options. I hired you to tell me which one to go with.'"

Several advisors point out that one of the big differences in working with high-level executives is that they have what Hill calls "zero tolerance for mistakes." They are results-oriented. And they may view you as an extension of their own staff. Preaching, being pedantic, assuming that you know more than they do simply won't work. What does work is acting as a team. As Kautt puts it, "You go alongside, pull up next to the desk, and look at the work together, as if you were in a boardroom. Look at the problem together, ask what they think, then tell them what you think. If they don't know the technical details, I explain, but I let them make the decisions."

Building a client base in this rarified market depends on referrals from attorneys, accountants and other clients. "Forget overt marketing, advertising or seminaring," Kautt says. Cold calling doesn't work. But neither, as a rule, do referrals from dissimilar clients. In Kautt's view, clients with only $1 million or $2 million in investable assets seldom refer up to the executive suite. You want the ones who "hang out together on the yacht and in the boardroom," he says.

What if these referrals already have a financial plan--perhaps courtesy of a perk offered by their employer? Then, Sapers suggests, you can offer to review the plan and see if it's adequate. More than once, she has seen instances of "a planner not drilling down to the details, ignoring things like beneficiary designations that can have tremendous consequences."

Whether you are getting ready to propose a new financial plan or to review an existing plan, the key is to position yourself before the opportunity arises. You need a team--sole practitioners almost never succeed in this market--and you need the breadth and depth, both in-house and via a network of outside experts, to meet client expectations across the board.

Grace W. Weinstein ( is the author of 13 books, including The Procrastinator's Guide to Taxes Made Easy (NAL, 2004). A freelance financial writer based in Englewood, N.J., she has been a columnist for the Financial Times and Investors Business Daily.

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