If you’re holding stock options from your employer, our Employee Stock Options Strategy will help you answer these questions:
- Should I exercise my options now or risk holding out for a higher price in the future?
- What are the tax consequences of exercising my options?
- How do my company stock options impact my overall portfolio?
- Should I use my company’s broker to exercise my options?
These questions have far-reaching consequences, and there are often no easy answers. When addressing these challenges, the best approach is to seek the advice of both a fee-only registered investment advisor and a certified public accountant (CPA). Because exercising stock options is an investment issue as well as a tax issue, these types of advisors can help you get the maximum value from your options. Our Employee Stock Options Strategy will help answer these questions.
The role of your investment advisor is to help you manage your stock options in relation to your other investments. For example, if you work for an energy company and you have a large number of stock options, your advisor should help you diversify into other non-energy related holdings so that you are not taking on too much risk. Your CPA’s role is to work with your investment advisor on minimizing your tax burden and avoiding any unexpected tax issues when exercising your stock options.
The decision to exercise stock options is difficult because no one blows a whistle at the top of the market and stock options expire, thus losing all of their value if left unexercised. Based on our experience over the last twenty years working for executives on these issues, we have found that the best approach is to develop a disciplined strategy for exercising options over time. This should include deciding upon specific stock prices in which the options would be exercised. By making these investment decisions well in advance of the option’s expiration date, there is less of a temptation to hold out for a higher price, which may never occur.
Just like picking a doctor for a challenging medical issue, your interests will be better served by choosing advisors who specialize in specific areas such as a registered investment advisor for your investments and a CPA for your tax matters. To eliminate potential conflicts of interest, both your investment advisor and CPA should be compensated on a fee-only basis. Preferably, neither advisor should be employed by the same company or by a bank, a broker, a mutual fund, or an insurance company. Most importantly, their fees should not be contingent upon exercising your options. There should also be no financial incentives to recommend financial products, such as mutual funds or annuities.
Stock options can be very complex. However, by having trusted advisors on your side with your best interests at heart, you are more likely to get the best possible results. For a comprehensive review of your stock options and other investment matters, please contact us.