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Managing Stock Concentrations at Every Life Stage

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Managing executive clients’ equity compensation, and the resulting company stock concentration, is among the top challenges faced by advisors. Learn how a goals-driven approach can help.

With equity-linked compensation representing more than half of total compensation for many top executives, nuanced planning for concentrated equity risk is critical at each stage of an executive’s life and career. This is particularly true during times of market volatility and in the unlikely event of disability or after death. Often, traditional planning overlooks such life events, focusing instead on the exercise of stock options and management of grant awards during employment and upon retirement.

Portfolio concentration risk, which poses a risk to any portfolio, is heightened for executives with significant equity-linked compensation and may jeopardize their ability to fund lifetime goals. Even in normal market conditions, concentrated assets offer higher risk with no additional expected return versus a diversified portfolio of similar risk assets. The problem is further exacerbated if the executive and/or their heirs have an emotional connection to the stock that makes them reluctant to diversify the position.

Top Challenges When Working with Concentrated Positions

  1. Executive’s unwillingness or inability to diversify due to a sizaeble tax liability or regulatory restrictions.
  2. Client’s emotional ties to company stock that result in behavioral biases, such as overconfidence in the company or anchoring to a specific stock price.
  3. Trusts established for heirs that inadvertently omit a plan for diversification or provide minimal guidance for retention and diversification of the concentrated holding.

Despite these challenges, there are strategies your executive clients should consider to manage concentrated equity positions at each of their life stages and after death.

Download the full paper for insight on:

  • Developing a statement of wealth transfer intent that addresses the role company stock played in the executive’s life and their general philosophy on its retention or sale in the event of disability or death
  • Dealing with the challenges and opportunities of concentrated equity holdings, including common concentrated equity positions, tax treatment, regulatory restrictions and planning considerations
  • Employing sophisticated diversification and risk mitigation strategies such as 10b5-1 plans, hedging strategies, gifting to family and philanthropy and grantor retained annuity trusts
  • Planning for concentrated positions at different life stages, including active employment, retirement, disability and death

The nature of executive compensation inevitably leads to concentrated wealth, making a sustained focus on the risks of company stock concentrations a critical element in planning for executives.

You can help by advocating for a plan that is grounded in your client’s unique goals and addresses concentration risk at each life stage: during active employment, at retirement, upon disability and after death. The considerations and options differ for each stage and are rife with regulatory complexity.

We welcome the opportunity to work together to ensure your executive clients have an informed, purpose-driven plan for diversification of concentrated wealth.

PROFESSIONAL ADVISORS

Managing Executive Stock Concentration

Learn how a goals-driven approach can help manage executive stock concentration at each stage of life.

THE NORTHERN TRUST INSTITUTE

Proven Advice for Moments that Matter

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InvestingEstate planningWealth transfer

Disclosures

This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.

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