Last Updated on 08/12/2023 by Carl-Peter Lehmann
As an executive, you’re well aware that your financial landscape is unique and complex. Your wealth is typically tied to the success (or otherwise) of the company you work for – primarily via its share price – and the share options that form a large component of your remuneration package. Having a large portion of your income and financial security dependent on factors that can be out of your control (like how the market perceives the value of your company) – not only brings substantial rewards – but also presents distinct challenges in managing and growing your wealth. In this article on financial planning for executives, we aim to guide you through the nuances of financial planning that are tailored to your specific needs, offering strategies to maximize your financial potential.
1. Maximizing Employment Benefits
Your journey in financial planning starts with a deep understanding of the benefits your role entitles you to. As an executive, your compensation package is likely more substantial and varied than other employees. Equity rather than cash are likely to form the bulk of your financial package, as the value of your stock options begin to accrue and vest. Hefty bonuses linked to the achievement of various KPIs will also be part of the mix – and then there are the other benefits – from retirement fund contributions, to risk benefits. It’s crucial to thoroughly review and understand every aspect of your package, as it forms the foundation of your financial planning.
2. Be Smart With Your Share Options
A significant part of your remuneration may come in the form of share options, a potent tool for wealth accumulation. However, these options come with their own set of risks and opportunities. The potential for substantial gains exists if your company’s shares performs well. Yet, this benefit is intertwined with market volatility and concentration risks, making diversification and strategic timing of exercise and sales crucial. It’s vital to seek professional guidance to navigate these complexities effectively. Once your stock options exceeds 10% of the value of your portfolio, your position starts to become concentrated and the risks increase exponentially.
3. Know Your Exit Plan
As an executive, achieving financial independence is likely a key goal. This isn’t just about preparing for retirement; it’s about gaining the flexibility to decide when you wish to retire. Unlike most people, who need to work as long as possible to maximise their retirement fund savings in order to afford a comfortable lifestyle – if you plan well you have the option of calling time on your career or doing something totally different well before ‘normal’ retirement age. A comprehensive financial and wealth plan, including cash flow modelling, will help you stay focused on your goals and resilient in the face of uncertainty.
4. Protect and Diversify
Financial security involves safeguarding your wealth against the potential uncertainty of your company. This means being mindful of the risks associated with having a large portion of your wealth tied to your employer, whether through equity-based incentives or pensions. Have a strategy for trimming your position on a regular basis as shares vest to reduce the concentration, diversify into other names and asset classes to grow your nest egg in a more balanced way – and don’t forget to make sure your risk cover and financial protection is adequate to cover any potential shortfalls.
5. Effective Tax Planning
Managing your affairs in a tax efficient manner will always be part of the equation. But being on the highest marginal tax rate means you don’t get a lot of respite. Using tax efficient investment wrappers – and working closely with a specialist who can help you navigating the complexities of the tax system is a critical aspect of maximizing your wealth. Efficient tax planning ensures that you’re not paying more than necessary and that your investments are structured to make the most of available tax advantages. Tax planning also extends to your estate and succession planning aims, which may include setting up trust structures and planning for the transfer of wealth to your kids and future generations. There is a lot to consider and unpack.
6. Taking Care of Family
Your financial planning likely extends beyond personal wealth to supporting dependents and other family members. This broader approach involves assessing the impact of your financial decisions on those you care for, ensuring that you can maintain your lifestyle while fulfilling these additional responsibilities. Getting kids through school, tertiary education (potentially abroad), and making sure all eventualities are planned for takes a lot of thought and work. You’re busy, which can mean these are some of the things that are neglected.
Consider: When last have your properly reviewed your estate plan to make sure all your affairs are in order?
7. Your Customised Investment Blueprint
Investment strategy is a balancing act between risk and reward. As an executive, you might be open to taking risks, yet sensitive to losses. Working with a financial planner to establish investment portfolios that align with your risk tolerance is crucial. These portfolios should be tailored to benefit from market upswings while minimizing losses during downturns. You’re lucky in that you don’t necessarily need to shoot the lights out with your investment returns – rather preserving capital and allocating money to strategies that have assymetric return profiles – like hedge funds, alternatives and other more bespoke solutions, will allow you to build a highly diversified portfolio able to withstand shocks better than most.
The Henceforward Approach to Financial Planning for Executives
At Henceforward, our approach to financial planning for executives is rooted in a deep understanding of the unique challenges and opportunities you face in your professional journey. Recognizing that your financial landscape is intertwined with the evolving dynamics of your industry, we focus on creating bespoke strategies that align with your specific goals and lifestyle aspirations.
Our process begins with a thorough assessment of your current financial situation, including an in-depth review of your compensation package, especially elements like stock options and other incentives linked to company performance. We then craft a personalized plan that balances the need for wealth accumulation with risk management, tax efficiency, and long-term financial security.
Emphasizing a proactive and adaptive strategy, we guide you through various stages of your career, ensuring that your financial plan evolves with your changing needs. At Henceforward, we are committed to empowering you with the financial confidence and clarity needed to make informed decisions, enabling you to focus on what you do best – leading and innovating in your field. Often, there will also be cross border financial and investment strategies to consider. We look at everything!
Closing Remarks on Financial Planning for Executives
In your role as an executive, effective financial planning is multifaceted and ongoing. It encompasses understanding your unique compensation structure, managing risks and opportunities associated with stock options, achieving financial independence, ensuring security for yourself and your loved ones, and crafting tax-efficient investment strategies. Embracing these strategies will guide you towards financial security and personal fulfillment.
Carl-Peter Lehmann
Carl-Peter is a Director and Partner at Henceforward. He is a Certified Financial Planner and Investment Professional, with more than 20 years experience helping executives manage their wealth and financial affairs.
