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7-Step Framework for Equity Decisions
Equity compensation can be a result of many successful careers, potentially representing a significant portion of overall net worth. We partnered with Bruce Burrows, Managing Director Wealth Management to highlight some of the considerations that employees should think about for their equity awards. But the steps that turn an employee stock purchase plan into wealth requires planning to help realize life goals.
Part One is a seven-step framework1 to help connect plans to dreams through informed decisions... Kind of a focused variations of Socrates’ ancient injunction to “Know thyself!”
1. Values
What does money mean?
There's no right or wrong answer, but each person needs to know what’s important to them.
Excitement of Investing
Thrill of Growth
Family Security (5, 10, 25 years)
TIP: Be true to financial values such as ability (or not) to take on risk and plan from there.
2. Goals
What are the employee’s personal and professional goals—and risks—over the immediate, short and long terms?
Emergency Fund:
3 – 6 months of living expenses
Short Term:
Vacations
Education
Second Home
Gifts to charity
Long Term:
Retirement goals
TIP: Plan for and understand the impact on goals with a liquidity event. Be aware of
possible black-out periods.
3. Relationships
Who else is part of the journey?
A holistic plan for equity compensation recognizes that life is shared with others.
Community
Immediate or Extended Family
Charity or Religious Affiliations
Pets
TIP: Relationships evolve or shift a bit as time goes on, remember to update the plan
accordingly.
The best advice for reaching lifetime goals is to plan.
Trying to play catch up doesn't work as well.
Bruce Borrows | Managing Director Wealth Management
4. Assets
What’s the location and allocation of various asset buckets, beyond the employeestock purchase plan?
Assets may be in retirement plans, college funds or real estate. It may be in stocks, bonds or cash. It may be in taxable, tax deferred or tax-exempt accounts.
Where Are
the assets?
How Does Equity Compensation Fit In?
What Type of Returns Are Required to Meet Goals?
How Will That Change Over Time?
TIP: Effective decisions require a comprehensive financial picture.
5. Advisors
Who can help make the right decisions as part of the employee financial journey?
Professionals can not only help prepare the overall plan, but also help make adjustments along the way.
Tax Advisors
Financial Advisors
Legal Advisors
TIP: Not just for complex planning decisions, professional resources also help with basic
overall equity compensation understanding.
6. Portfolio Process
What process works best, given time, career and other constraints as part of decision-making to achieve life goals?
Understand from the outset what makes most sense, such as checking in:
Monthly
Quarterly
Semianually
And decide on the scope to focus on for each portfolio check in:
Concentrated Equity Position
or
Complete Diversified Portfolio
TIP: Decision making at the best possible time for diversifying could potentially mitigate some
risk to help meet overall goals.
7. Interests
What are the employee’s interests and how are they likely to change over time?
As equity compensation grows, this can become an important part of the overall plan.
Travel
Physical Activites
Philanthropy
TIP: Gifting strategies, for example, become particularly important for equity with a low cost
basis.
“Your values and goals will determine when you want to sell or when you want to diversify your equity holdings.”
Bruce Borrows | Managing Director Wealth Management
An Evolving Foundational Framework
As career, family and goals evolve, these seven considerations will shift. So will a good plan. But understanding exactly what equity compensation offers, how it connects to overall wealth and life, and what the framework is for decisions along the way—even without perfect adherence—helps lead to fewer unprepared reactions and potentially better outcomes.
Get in touch with Morgan Stanley at Work to learn how Morgan Stanley’s Equity Award Analysis tool helps further frame some of these important decisions.
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Disclosures
1 https://www.cegworldwide.com/
Asset allocation, diversification and rebalancing do not assure a profit or protect against loss. There may be a potential tax implication with a rebalancing strategy. Please consult your tax advisor before implementing such a strategy.
Morgan Stanley at Work, Shareworks, Morgan Stanley Smith Barney LLC, and its affiliates, employees and Financial Advisors do not provide legal or tax advice. Individuals should consult with their tax/legal advisors before making any tax/legal-related investment decisions.
Morgan Stanley at Work services are provided by Morgan Stanley Smith Barney LLC, member SIPC, and its affiliates, all wholly owned subsidiaries of Morgan Stanley.
© 2022 Morgan Stanley Smith Barney LLC. Member SIPC.
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