Corporate executives have unique challenges when considering the management and investment of their personal financial assets. While they are generally very well paid, and are therefore in a good position to save and invest for their future, in addition to enjoying their life now, they often have little control of how or when they are paid and, without advice, they can end up paying more tax than necessary, and making ad-hoc and less than fully -informed investment decisions with their surplus cash.
Some of the characteristics we associate with corporate executives include:
- Corporate executives tend to be very well paid, with high salaries, further supported by bonuses tied to performance goals.
- They are likely to have meaningful value built up in shares, or options over shares, in their employer’s business.
- They often are entitled to participate in complex benefit plans
- Their financial fortunes (future income and personal balance sheet) are heavily dependent on the success, or otherwise, of their employer.
The unique financial planning challenge
As a result of these unique characteristics, financial planning for corporate executives is very different to that needed by other individuals. Their salary and bonuses, stock options and often their equity portfolios are reliant on the performance of a single company – their employer. While a highly concentrated exposure to a single company can work out well (think early employees of Microsoft or Google), it does come with a high degree of riskFortunes can change for any business because of general market conditions, or indeed specific company challenges, resulting in falling stock prices (e.g. employees with big savings in Irish banks pre global financial crisis), and therefore any concentrated exposure needs to be carefully considered and managed.
Because of the time-poor nature of the working environment of corporate executives, there can be a tendency to neglect their own personal finances and not give sufficient time and attention to developing a structured financial plan with an investment strategy that mitigates this risk of over-exposure. This over-exposure to a single company is also often completely at odds with the personal risk appetite of the executive, as it is hard to objectively assess the risk associated with a company that you are actively involved in on a day-to-day basis. In addition, in many cases, the only time corporate executives have an opportunity to consider their investment risk appetite, is when they are joining the company pension scheme and need to select an investment fund/funds to invest their contributions in.
Investment planning for corporate executives
Adopting a bespoke approach to financial and investment planning is the best way of catering for corporate executives’ individual circumstances, including their unique reward structures and equity participation in their employer, and the part that this plays in their overall financial circumstances. Corporate executives often have a clear sense of when they will stop working, or step back and work on their own terms, so their route and timeframe to retirement also need to be incorporated into the planning process.
When developing an investment plan, the first step is to establish clear objectives and understand their time horizons. It is important to understand your current position; what assets you have and where they are invested. For corporate executives, these will likely include company shares, share options, pension benefits (including pension benefits from previous employments) and other investment assets e.g., property. All of these need to be considered together in order to optimise the investment outcomes, while also accounting for risk tolerance and the required rate of return. When all assets are considered together, the risk associated with high exposure to the executive’s own employer can be measured and mitigated, either directly, or through the investment approach taken with other assets.
Diversification is key, but it may take time to get there
Diversification of investments is one of the most common principles of building a balanced investment portfolio. For corporate executives, this needs to be considered very carefully – it is not simply a case of just selling some company stock and diversifying, as there can be tax implications in doing so, among other factors to be considered. They need to have a long term and diversified investment plan that takes account of the full range of their financial assets and the role of each asset. For example, corporate executives tend to have generous pension benefits that can accumulate quickly over time due to the associated tax benefits for pensions. Over time, fund selection within their pension scheme could play a significant part in managing their risk exposure and provide much-needed flexibility within their overall investment plan.
Financial planning with Acuvest
We are fortunate at Acuvest to work with executives at some of Ireland’s largest companies. These executives enjoy excellent and often complex reward packages that are strongly linked to the performance of their employer. We support these executives in developing their personalised investment plans, taking account of the full breadth of their financial assets. We help them to maximise the impact of their reward packages while achieving their future lifestyle ambitions in a measured and more certain way.