Wealth strategies: the executive’s guide to personal finance

Lauren Jenkins  00:00

Welcome to prosperity at work. From JP Morgan, workplace solutions, the podcast all about equity compensation, financial well-being and more. And you can learn more about financial wellness and employee equity education with our new ebook. Check out the show notes for a link to download it now. I’m Lauren Jenkins, Executive Participant Servicing at Workplace Solutions.

Chris Dohrmann  00:18

And I’m Chris Dohrmann, Strategic Partnerships at Workplace Solutions.

Lauren Jenkins  00:23

All right, Chris, let’s talk about financial wellness. It’s been defined in different ways over the years. One definition I like is that financial wellness is being able to pay bills, manage expenses, save for emergencies, and feel confident about the future.

Chris Dohrmann  00:38

Yeah it’s not just about getting paid or getting rich, it’s about doing well with your finances,

Lauren Jenkins  00:42

and for that reason, it’s a huge consideration for many companies with an equity compensation plan too. And you can learn more about financial wellness and employee equity education with our new ebook – check out the show notes for a link to download it now.

How does financial wellness and educating people on it improve engagement and make your offering more valuable to employees?

Chris Dohrmann  01:02

Today’s guest has a very interesting angle on this topic. Bob Fritz is head of executive advisor at JP Morgan private bank, so he spends a lot of time talking about what makes top business leaders feel happy and secure with their finances, and he’s with us now. So Bob, welcome to the podcast. Thank you very much. What I wanted to start with is for the folks listening, I wanted to just have them. You know, if you could give us a brief rundown about what you do here at JP Morgan.

Bob Fritz  01:29

Yeah, thanks. I run the Executive Advisory Service for the within the private bank, and within that position, I’m, you know, frequently introduced by our bankers, really talented people to meet CEOs and CFOs and other senior executives at some of the largest and most profitable companies across the US. And we talk about their compensation plans, their benefit plans, how it impacts them personally and what decisions or elections should they be making? So that’s how I take up my day is really just meeting people and helping them kind of, kind of guiding them through their decision points and getting them to the place that they need to be, as relates to their comp and benefit plans.

So it’s very interesting to get really close and connected to senior executives. And they probably don’t do that too much, you know, during the normal course of their lives, but the conversations we have, we get them to that place, which is really kind of interesting to me, beyond just the technical comp and benefit plan stuff, it’s just interesting to get to know them on a personal level.

Lauren Jenkins  02:39

So Bob, let’s start with the big picture. We all assume that leadership and C suite level executives know everything about their equity and financial wellness, but that’s not always true. Is it?

Bob Fritz  02:49

No, correct? It’s not. It’s not always true. I mean, think about what a C suite executive is going through. They’re spending, like the vast majority of their time running the business as a CEO or CFO or chief operating officer or a division leader, they’re running their business. That’s their job, and that’s like consuming them most of their days. And then, of course, on the weekends, when they’re kind of off the clock, they’re want to spend time with their family and friends and do all those other kind of things. So while they’re, you know, really smart and experienced in it, they don’t spend the time to analyze their own compensation and benefit plans as much as they should. So I think the value we bring is helping them to digest those relatively complex issues, understand them as people, and guide them very efficiently and effectively towards the right decision. Again, they could spend like, whole Saturday afternoon trying to figure out what they should do on an equity plan decision or a comp plan decision, but if they can have somebody come into their lives and say, Look, this is what you need to do. Here’s the right decision for you personally, here’s where it sits, it fits and foots. With your personal financial planning. And if we can do that, like, effectively, in the course of like, 1020, 30 minutes, that’s what they’re looking for from the service we provide.

Chris Dohrmann  04:12

And you’re so right. I mean, equity is becoming even a larger portion of their total compensation. In the US, it’s probably approaching 60% and the rest of the world is probably, you know, approaching 50. So this isn’t something they can sleep on, right, correct?

Bob Fritz  04:30

I mean, it’s, it is it is everything they’re all about. It is they’re going to be their retirement plan. It is their wealth accumulation. If they don’t manage this the right way, it can lead to kind of some bad, you know, bad outcomes down the road. So if we can make make sure they’re making the right decisions at every stage of their career. And I think of it in kind of three stages. I look at it as the emerging executive that’s new to the C suite, that’s introduced to equity plans and deferred comp plans, and they come to us and ask, like, what is this all about? How do I think about this? How does this work in my overall financial plan, that’s phase one. Phase two. I think of it as the existing executive that’s been in these plans for a few years has accumulated wealth and has become a bigger part of their personal financial plan. And then the third phase, of course, is the exiting executive that is looking to retire or move on to another position or do something else, and have they made the right decisions around that, those comp and benefit plans so that they if they’re retiring? Are they taking the deferred compensation over a number of years? Have they thought about their equity accumulation in such a way that they’re managing that the right way as they retire, and can kind of reduce that concentration in their post retirement years and make sure that they’re locking in the wealth that they’ve accumulated over their executive experience. Absolutely.

Lauren Jenkins  05:52

Can you talk a little bit more about the impact that equity compensation can have on an executive’s retirement?

Bob Fritz  06:00

Yeah, look at as we’ve just discussed. I mean, I think that the, you know, the wealth accumulation and the equity plans, whether it be through restricted stock units, performance stock units, stock options that are granted to them, these are, you know, wealth accumulation vehicles. When you think about it, if you’re a private company owner, you know, it’s all in the company, and then at some point you have a transaction, and you sell off the firm to somebody else. And that’s how they accumulate their wealth. With public company executives. It’s all in the company benefit plans and their performance around that helps them accumulate, you know, wealth over time. And they’ve got to manage that wealth. It’s got to be, you know, it’s accumulation, and at some point it becomes management around that concentration of stock, just to make sure that they’re securing their own financial future. And that could be just, you know, at strategic times, maybe selling off that company stock and diversifying into other assets and kind of having a balanced portfolio. It could be through estate planning and other vehicles where they want to balance out their estate between themselves and their spouse, so they do some creative estate planning items there. Or maybe it’s gifting to, you know, family members, children, other family members, where they set it up such in such a way that they can gift the appreciation of the stock on a very tax efficient way down to the next generation, say their children or other family members. So and then, of course, there’s the charitable side of the world, where the accumulated stock over over a period of time, you have got a lot of appreciation in it. You’ve got charitable intentions. So you either gift outright to charities, or you establish a donor advisor, donor advised fund that will, you know, allow you to make a donation today, and then you can give the assets down the road. So kind of managing all of that in those three stages that I just mentioned, where you’re accumulating wealth, you’ve got the wealth, and where you’re thinking about maybe, you know, diversifying yourself away from the company’s die

Chris Dohrmann  08:04

So Bob, just to go back to what you started with, many of these executives, with maybe the possible exception of the CFO, financial wellness, is not something that in the US we do a good job of preparing people to address, and I think people need to be much more comfortable admitting that. And you know, how is it that you can set these folks up so that they can feel comfortable and productive by learning how to be the best advocate for their own financial wellness?

Bob Fritz  08:27

Yeah, look at, I think, whether you’re the CEO the CFO or anybody else in corporate America, you know your strengths and weaknesses. And while, if we take a CFO, for example, very obviously sharp on numbers, they know what they don’t know, and the complexities of a comp and benefit plan is something that the CFO is going to realize. You know, again, to my earlier point, you could, you could analyze this all weekend long and try to come to right decision. Or you can ask somebody like myself or your JP Moore. And banker to help you and navigate that in a very effective way. So I think people, the clients that I’ve met over 30 plus years will come and say, look, and I understand the basics of it. But what should I do, like, what are the specific intricacies of the plan that I should understand, and how does that impact me personally. How does that, you know, benefit my financial wellness down the road, so that I can make the right decision? You know, they realize that they know a lot. They’re very smart people, but if they can have somebody kind of efficiently and effectively guide them to write the right decision, that’s where they want to be.

Lauren Jenkins  09:33

Now we’ve heard you speak about the importance of timing around stock options. Can you expand a bit on that here?

Bob Fritz  09:38

Yeah, I think, I think, because I’ve seen people exercise options over the years, there’s a couple of mistakes. You can do it way too late in the cycle. So a typical stock option grant that’s, you know, available for 10 years. People wait until the eighth, ninth or 10th year of an option grant. And there’s a lot of bad things that can happen to a stock option in those later years that has nothing to do with the company. It could be market driven reactions, or industry driven reactions, or something else that drives that stock price down. And you know, if you’re at you’re at the end of the extra expiration period, and you’ve got to do something. Now, I suppose you could always buy the stock through the option plan pay the taxes on it, but that’s a pretty large check to write between the option cost and the tax cost, and people are reluctant to do that. On the flip side, people will exercise too early in an option period. So the option invests over two or three years. It comes into some money. They see the value there. They get anxious about it. They want to exercise. And what they’ve effectively done is given up the free upside leverage, the free upside leverage with an option plan, and what you want to do is strike that right balance. You want to ride that option exercise ability as long as you can, without exercising too early or too late. If my rule of thumb, candidly, is if you’re in the second half of the option period, meaning your six or beyond, and the stock price has doubled, you should be thinking very seriously about exercising that option again. It avoids exercising way too late, where you could experience a big downturn in the stock and lose some value, and it avoids the exercising too early, where you’ve missed a lot of that free upside leverage in the stock.

Chris Dohrmann  11:29

Okay, I’ve already addressed the fact that most companies are starting to expand the percentage of equity in a total compensation package for executives. But is there something the company should be thinking of, because let’s just pick two options, whether it’s RSUs restricted stock units, or whether it’s, you know, stock options, as you mentioned, is there something the company should be thinking about when they decide which they’re going to choose for their executives. Yeah,

Bob Fritz  11:55

I think, I think in most public companies, in private companies, there’s a lot of emphasis on the stock option granting, which makes a lot of sense, right? You want to, you want to incentivize everybody to maximize the company value before goes, before the company goes public. So you want to, you know, tie everybody’s interest and abilities towards that stock option granting. So whether it be non qualified options or incentive stock options which have different track tax treatment. You want to, you want to emphasize that with large public companies, with our public companies, what you see commonly is a mixture of restricted stock units and performance stock units. Of course, the difference is restricted stock units. It’s just the it’s just the the time value of it. So it vests over two years or three years with a performance stock unit. There is a performance trigger in addition to that time vesting element where they have to meet certain revenue growth targets, or profitability or EBITDA growth or something like that, and it’s tied to that. So they’re if they’re granted 100 shares, that 100 shares could turn into either 50 shares, if that doesn’t work out the right way, or 150 or 200 shares, if they do perform the right way. So what we see with public companies is a mixture of RSUs and PS us, and kind of driving the right behavior by the management team to hit some sort of financial goal. And it could be kind of a two thirds, 1/3 mix. I don’t think companies do all performance, share granting because, you know, things could not work out. You know, nothing to do with the executive management team, nor do they want to just offer RSUs that all you need to do is just wait it out and you get paid out, you know, down the road. So it’s kind of a two thirds, 1/3 mix is what we’re seeing out there. Yeah. There’s

Lauren Jenkins  13:40

Also the matter of incentive stock options, also known as ISOs, often issued by pre IPO companies. Can you give a quick guide to those?

Bob Fritz  13:50

Sure, so ISOs are a bit complex, but they’ve really got some really interesting tax treatment to them. So if you think about non-qualified stock options and NQSOs, they’re taxable the minute you touch them. So if you exercise and sell or exercise and hold, you have an immediate tax consequence. And it’s an ordinary tax consequence in the US, taxed at 37% plus your State Taxation, so that that the minute you touch them, it’s immediately taxable with incentive stock options ISOs, the it is not immediately taxable if you exercise and hold those shares. So think about, you know, if you’ve got if it was granted at $20 a share, and the stock is at $40 a share, when you exercise that $20 spread is not taxable to you if you decide to exercise and hold those shares. And the advantage, of course, is that if you exercise and hold those shares for more than a year, you receive long term capital gains treatment on that on that stock that you received. And that’s very tax beneficial versus paying the ordinary income tax. The caveat to this, which makes it complex, is that when you exercise and hold an incentive stock option, share is not included in your regular tax but it’s included in your alternative minimum tax calculation. So that could produce an AMT for you, not they’re not in the current tax structure. There’s not a lot of people that are subjected to the AMT, but it is a factor, and clients should consult with their tax advisor around the exercise strategy on that to me, if you exercise an incentive stock option and hold it and you do trigger an alternative minimum tax, the AMT, it’s not the worst thing in the world. You’re paying some tax, but the AMT that you’re paying is in the form of a credit against future taxes. And I want to get too, too technical here, but you’re kind of pre paying some taxes that you’ll get the benefit of down the road. So ISOs, if you have them available to you, you should consult with your tax advisor around the right way to exercise the grant. But there’s some, some real benefits to this that, you know, clients should realize that’s available to them. And

Chris Dohrmann  16:06

Just, I want to just touch into that, because you’ve been very generous with your opinion, and it’s a very valuable one. So maybe as a bonus. Or the last question would be, what are the most effective ways that companies can ensure that their executives get the type of education they need to accurately appreciate and then handle the rewards that they’re being given.

Bob Fritz  16:28

Yeah, look at I, you know, I think companies can provide their executives with, you know, a resource around them that understands their comp and benefit plans thoroughly, which we do here, you know, understanding how the option plan works and how the other plans work, the 401 K plans, the deferred comp plans. You know the retirement plans overall, if you can arm executives with that kind of resource to them, that is very valuable. Because if you’re in the Human Resources area where you’re obviously designing and developing and rolling out different benefit plans, you want to make sure that the executives are taking advantage of them the right way. They understand them. They’re maximizing them. But unfortunately, in the Human Resources world, they really can’t be that resource around it, because they don’t understand the executives specific interest in their own personal planning. So if they can combine that, you know, rolling out of the of the benefit plans with some experts around it that can help the executives get to a decision and do it effectively and efficiently for the, you know, honoring the busy executives time. That’s the best thing they can do, is make sure that they’re, you know, arming the executives with somebody that can digest the benefit plans, understand it now realizes or how it affects the executive and how they can guide the executive to the right decision. That’s the best thing that they can do. Bob,

Lauren Jenkins  17:54

Thanks so much for joining us today. We really appreciate you sharing your knowledge.

Chris Dohrmann  17:59

Thanks, Bob, it’s been a pleasure.

Bob Fritz  18:00

Thank you very much. I’m glad to spend some time with you. I think it’s really interesting opportunity to talk about executives and how to serve them the right way and maximize the company benefit plans that are available to them.

Lauren Jenkins  18:10

And that’s it for this episode of prosperity at work from JP Morgan workplace solutions. And as

Chris Dohrmann  18:15

always, if you made it this far, thanks for listening. If you’ve enjoyed this episode, we hope you’ll review rate and subscribe to JP Morgan. Oregon workplace solutions, prosperity at work. Wherever you get your podcasts, you can

Lauren Jenkins  18:26

Find more insights on equity compensation, financial wellness and more by following us on LinkedIn or at globalshares.com where you can also download our new global equity compensation survey report.

Chris Dohrmann  18:40

Until next time that’s prosperity at work, bye. The information provided in this podcast is intended for informational and educational purposes only. It may contain views which differ from the views of JPMorgan Chase and company. For specific guidance on how this information should be applied to your situation, you should consult a qualified professional for full details, see the show notes on your podcast player right now

Lauren Jenkins  19:04

The prosperity at work podcast is produced by dustpod.io for JP Morgan workplace solutions.

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