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Categories
Practice Management
Developing expertise in analyzing stock options
Michelle Watts
Solutions Portfolio Manager
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Understanding potential strategies for handling stock options is a way to add value with clients who are corporate executives. Michelle Black, wealth advisory senior manager at Capital Group Private Client Services, explains the three areas of analyzing stock options that are most important for advisors to bolster expertise in to be effective with these financial instruments.


Video


 


Transcript


Michelle Black: Options are becoming less popular as a form of equity compensation than they were even just 10 years ago. They’re still prevalent in many executive compensation plans. It, therefore, almost goes without saying that developing an expertise in stock options and how to evaluate them will only serve to enhance your ability to work with corporate executives. It’s definitely a complicated topic, but you start to bone up on your knowledge by researching how options work, the differences between non-qualified options or NQSOs and incentive stock options or ISOs.


There are a number of issues specifically related to taxation that will be key to planning strategies when multiple grant types are held. You’ll find some helpful information in this regard on our website. Second, you need to understand how options are valued, the difference between intrinsic and time value, and specifically what drives time value since this is theoretical. Once you have that down, you’ll be able to better guide decisions around exercise to minimize the risk that executives leave money on the table or that they hold on too long and, therefore, risk the option going under water and expiring worthless.


Third, do some digging to get a better understanding of what motivations may be driving the executive. For some, they may want to exercise after the stock hits its 52-week high as a rule of thumb and, therefore, they exercise sooner than what you might otherwise suggest. Now, others may want to delay exercising as close to the expiration date as possible to postpone the tax. But, this may or may not be a good idea depending on the stock’s underlying characteristics such as its volatility and its yield.


Finally, going back to taxes, given that any exercise of options has tax consequences, you’ll want to make sure that you understand how to coordinate the tax implications of exercise with the client’s overall plan. For example, understand when exercising non-qualified stock options and ISOs in tandem works well and why.


By investing a little time into the three areas that I’ve outlined above, you’ll set yourself up on a path to become proficient in advising clients who hold stock options and this can only serve to enhance your overall ability to work with corporate executives.



Michelle J. Black is a solutions portfolio manager with 27 years of investment industry experience (as of 12/31/2021). She holds a bachelor’s degree in business administration, finance from the University of Southern California.


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Practice Management
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Tax & Estate Planning

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