While business owners and founders occupy much of the high net worth market, these employee execs have plenty of unique considerations
James McCarthy makes a rough estimate that about eighty per cent of his team’s high net worth and ultra high net worth clients are business owners, sole proprietors, and founders. Those are, in many ways, the ideal advisor’s client: significant assets, equity or total ownership in a privately held business, and a level of financial complexity that advisors can really help with. McCarthy, a wealth advisor and client relationship manager at Nicola Wealth, notes that the other roughly 20 per cent are a different core of high earning business leaders: professional executives.
These individuals, often the hired C-suite of larger — sometimes publicly traded — companies come with a unique set of considerations and challenges. Unlike business owners they may not have access to owned corporate structures that can improve tax efficiency. Instead, they earn a large amount of T4 income. They may also not have the same avenues for legacy planning that sole owners have. McCarthy explains how he and his fellow advisors can help serve these clients, despite their smaller menu of planning options.
“Business owners have the added flexibility where they can take salary or they can save in their corporation and take dividends. I often find with CEOs, CFOs and other executives, there’s often less room to structure their compensation. They may earn a high income, but much of it is fully taxable. That said, there’s a wide range of compensation structures across the C-suite, which opens up planning opportunities.”
McCarthy notes that there is a huge difference in the options available to the CFO of a large publicly traded company than there are to the COO of a more mid-sized privately-held company. Executives at a publicly traded firm may have significant stock options as part of their compensation, but that comes with stricter disclosure rules given the company’s publicly listed status. It may also come with restrictions on when those stock options vest.
Privately held companies may offer equity stakes as part of their compensation, which could be advantageous. However, those stakes come with a liquidity challenge. If an executive client wants to diversify from their equity holdings in the business, finding a buyer for those private shares may mean operating in a highly restricted and illiquid market.
In both cases, those stock option compensation structures come with significant planning considerations. For the public company executive it means expecting to incur a tax bill every year when their stock options vest and can be diversified. For the private exec it means planning around when a market for their shares might open up.
In both cases it also means planning for bonuses. In many cases executive compensation comes with significant annual or quarterly bonuses if key targets are met. The size of those bonuses, and the fact that they are not guaranteed, can present a planning challenge.
McCarthy explains that in making these planning decisions for executives, the information gathering stage is crucial. Often times executives will have come up in one company’s structure and assume their compensation model is standard, when it actually comes with a number of unique factors. Advisors cannot fall into the trap of assumption and must lay out exactly how that client is compensated in order to find areas where they can add value.
In McCarthy’s view, the greatest value he can add to these clients’ plans comes in the form of tax efficiency. While professional C-suite executives may not have the same options as business owners, McCarthy says he has “rarely found a CEO or a C-suite exec where we couldn’t explore opportunities for tax efficiencies.”
Beyond those tax savings, he highlights the time pressures that many professional executives are under. The relentlessness of their working days often makes personal financial management a comparatively low priority. An advisor can add value by taking that off their plate. Moreover, advisors need to stay cognizant of these clients’ time, ensuring peak efficiency in their communication. C-Suite leaders spend their days in meetings and are keenly aware of when their time isn’t being spent efficiently, advisors who want to break into this market need to stay aware of that fact. The challenge, for advisors, is that serving these clients well take the time to understand them completely.
“You really need to understand what their role entails. And that can't be learned overnight,” McCarthy says. “A lot of the CEOs we work with are in different situations. But over time, by working with many executives, you start to understand how they operate and how they prefer to communicate. That insight is key to building trust and speaking their language.”
