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While the majority of workers view their equity compensation as a critical tool for building long-term wealth, a recent survey from Schwab Stock Plan Services found that, out of the one-thousand equity compensation recipients surveyed, a mere twenty-four percent had exercised options or sold shares.

With over a third of the participants claiming that equity compensation was the main factor in accepting their position, it begs the question, why are the number of employees exercising their options so low?

The survey went on to find that over half of the participants surveyed stated fear of making a mistake as a major concern. Of the participants who had never exercised or sold their equity compensation, thirty-four percent said they were afraid of the potential tax implications of making a wrong decision, while another thirty-four percent were worried about selling under the wrong market conditions.

“The survey,” said Marc McDonough, senior vice president of Swab Investor Services, “made it clear that employees would benefit from more help in understanding the role this benefit can play in their long-term financial plan.” A point that is driven home by the fact that a whopping eighty percent of survey participants admitted they would be very / extremely confident making equity compensation decisions with the help of a financial advisor. However, advisors do need an effective means of providing guidance.

Advisors currently using StockOpter are well positioned to help put these fears to rest and to assist stock plan recipients in implementing a diversification strategy that allows them to use their equity compensation to attain their financial goals.

To help with restricted stock and long share decisions, StockOpter’s “Share Diversification Analysis” enables advisors and clients to interactively visualize the multi-year projected values of company stock compared to a diversified portfolio at various levels of annual diversification. Entering a hypothetical diversification rate into the “Diversification Dashboard” will generate a five-year projection of the value of the client’s investments held in company stock plotted against the value held in a diversified portfolio. For comparison, the program will automatically produce alternative strategies by varying the annual diversification percentage. This feature allows advisors and recipients to explore different diversification strategies for their company shares and determine an appropriate course of action based on their financial goals.

For deciding when to exercise and sell employee stock options, StockOpter’s “Insight Ratio” illustrates risk by calculating the current “Time Value” as a percentage of the “Full Option Value” (Time Value + Intrinsic Value). As an option gets deeper in the money and closer to expiration the time value decrease thereby lowering the Insight Ratio. A relatively low Insight Ratio (i.e. <15%) indicates risk because the majority of its value is intrinsic and highly vulnerable to decreases in stock price. For example, an Insight Ratio of 5% says that 95% of the Full Option Value has currently been realized and is at risk by continuing to hold the option. Consequently, the Insight Ratio is an excellent framework for determining when to exercise while considering concentration, planning horizon and risk tolerance.

Companies have granted billions of dollars in company stock and options to employees and less than a quarter have taken action for fear of making mistakes. This represents a big opportunity for advisors to drive revenue and grow their practices by providing equity compensation guidance. The key to doing this is having a process for illustrating risk to facilitate informed decisions.

You can review the entire Schwab Stock Plan Survey results here: 2018 Schwab Stock Plan Services Survey

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