Given the influx of investment alternatives available to clients, it is incumbent upon financial advisors to deliver more value to clients than ever before. Value for the ultra-wealthy client isn’t just “hand holding” anymore, it’s about the tangible results you bring to clients.
Unfortunately, million-dollar-salary-earning executives are often looked at as a set of numbers without regard for the high level of planning many of them require. They may be gracing the covers of Forbes and The Wall Street Journal, but at the end of the day they are just people. Attracting and retaining these execs is about understanding how they think, what they need, and serving them on a level that most advisors won’t.
The Neglected Executive
According to CBS news, the average CEO of an S&P 500 company earned $12 million in 2018. It may seem that the high-earning executive has got it made, but the reality is that for these individuals, being wealthy isn’t necessarily a picnic. Here are some of the worries that people in these roles tend to have — and that most financial advisors won’t bother to address.
- I’ve got so many things on my mind and limited time. How do I focus on what my advisor is telling me and articulate my true needs when I have so much that is distracting me?
- What if I get sued by my company’s shareholders?
- What if I am the subject of a frivolous lawsuit by someone who knows how wealthy I am?
- What if my money causes infighting with my family?
- Are my stock options diversified enough so that, if my company goes under, I’m protected?
- What if there is a loophole in my estate plan and my money doesn’t go where it was intended?
- How do I make sure all this money I am earning won’t put me into tax debt?
- Being high profile, I am a target for cybertheft and terrorism. What if someone finds out where I vacation or where my kids go to school; what if someone spills my secrets?
- What if my financial advisor, who I am making more money than, isn’t sensitive to my insecurities about money and just sees me as a number because I have so much wealth?
Advisors who want to work with the ultra-wealthy executive must have a higher understanding of the technical aspects of servicing them. Just being a great communicator or being really responsive are only going to go so far. In order to justify the high fees the client will be paying, the advisor will have to be able to point to ways that he or she has created real value in dollar terms.
The best way to achieve this is by having advanced knowledge of estate and tax planning. While you as an advisor are not necessarily going to be drafting legal documents or tax returns, you must be well-versed in the applicable laws.
Let’s take an example. CEOs are held to SEC Section 16 laws about insider transactions. You will have to intimately know this law as well as all possible implications for the CEO. How are some ways that people commonly misinterpret this law? Map out different scenarios demonstrating how the law applies to the stock grants that your clients may be receiving. What alternatives does this create?
Another example is related to concentrated positions as these executives are often heavily compensated in company stock. Executives compensated in this way tend to lose far more money in taxes than due to market volatility. As you know, once a dollar goes to the IRS it never comes back.
The biggest mistake advisors make is trying to do this themselves. A good solution is to have a covered call strategy that is run by a specialized professional who is dedicated to understanding the derivatives (put and call options, namely) that apply to the executive’s stock. You wouldn’t ask a general practitioner to remove your appendix — you need a surgeon for that.
A specialist in concentrated stock hedging strategies can help an advisor with corporate executive clients by:
- Identifying the solutions that are most advantageous to the client. For example, where to use a put option, or a zero premium collar, or a prepaid forward contract and the pros & cons of each
- Educating the client or prospect. A specialist will be able to explain each feature in more than one way, thus increasing the likelihood that the client or prospect will grasp the answer and move forward.
- Executing the most appropriate strategy in such a manner as to limit risk and minimize the likelihood of undesirable outcomes. A generalist advisor doesn’t want to “learn” or “practice” implementing concentrated stock hedging strategies on his/her biggest clients!
Summary on Reaching High-Earning Executives
Because executives are on their company’s benefit plan, advisors often misperceive the level of complexity of their finances. Understanding them better and responding with higher-level tax and estate planning services will require commitment and in some cases the willingness to bring other team members on board. This decision is often well worth the effort as this space is greatly underserved by advisors who don’t take the time to do so.
— Related on ThinkAdvisor:
- Your Client Has Too Much in One Stock. What Do You Do?
- 100 Questions to Ask in an Estate Planning Interview
- 12 Surprising Traits of the Wealthy
Prior to founding Gyroscope Capital, Egan joined Legg Mason in 1994 from American Express/Lehman Brothers.
He received a B.A. in economics from the College of William and Mary, an M.A. in economics from New York University, and an MBA from the Fuqua School of Business at Duke University. He is a graduate of the London School of Economics and Political Science General Course Program.