If you work for a publicly-traded company, the last thing that you want to worry about is unintentional insider trading. One strategy to help avoid insider trading is a 10b5-1 Plan.
10b5-1 Plans are excellent diversification agents. They help provide avenues to diversify out of company stock and avoid too much concentration risk in your portfolio.
If You’re Receiving Equity Compensation, Rebalance Your Assets To Avoid Concentration Risk
First, let’s start with the basics: diversify your investments.
Having any form of equity compensation tends to result in too much concentration in a single stock within your portfolio. Since options vest at different periods, you may not always be actively aware of just how much company stock comprises your net worth. Diversifying out of your company stock is necessary for a healthy, well-balanced portfolio.
But sometimes, especially for high-profile professionals, selling company stock can have an extra layer of complexity. Since you’re an active employee, selling your shares for a profit (notably a significant one) may be identified as insider trading.
The key to avoiding such a label is to understand the rules as an “insider” so you can optimize your portfolio and minimize concentration risk.
Why Concentration Risk Matters for Your Portfolio
Most people underestimate the risk of having a large percentage (over 10%) of their investment portfolio in a single stock.
Think about it like this: if your company went under, a 10% loss in your portfolio would be damaging, to say the least.
Everyone wants to believe that their company is rock solid. But no matter your thoughts on your company’s prospects and its stock, forces beyond your control can significantly damage an otherwise solid financial plan.
Furthermore, many people could achieve financial independence by reducing their company stock exposure, yet instead, choose to risk it all unnecessarily by holding most (or all) of their employer stock.
If you’re selling company stock, where could you redirect those funds? Your asset allocation should be unique to your risk profile, time horizon, and investment goals, but some available options to look at are stock mutual funds and exchange-traded funds (ETFs). These investments typically hold stocks in dozens of companies, adding another layer of protection and diversity that a single stock just couldn’t.
Concentration Comes With Dual Risk
Holding too much company stock isn’t only risky for your portfolio’s long-term performance; it’s also risky for your career.
Your success is often heavily dependent on your company’s success, from bonuses to salary increases to promotions and other career advancement opportunities.
Holding too much company stock and relying on your company for career satisfaction presents a dual risk situation that many people fail to consider. Not only is your income tied to one company, but so is your investment portfolio.
Do you really want the same place that provides you with the money to pay your bills to be the only source helping you save/invest for your future?
Of course not. We can help you create a plan that appropriately accounts for your company stock along with a rich array of other investments that can help you reach your goals.
Mind The Tax Tail
It’s rare (and rightfully so) to have a conversation about equity compensation without mentioning taxes. While taxes are a critical factor, they certainly aren’t the only ones.
It’s far too easy to get tax-blinders on and only want to make the most tax-efficient choice without understanding how that choice will impact your ability to reach your goals.
Rule of thumb: taxes are essential, and we do everything we can to minimize them, but the tax tail should not wag the dog.
Ultimately, we need to look at all angles to consider how a decision will impact everything around it. We want to help you evaluate your equity compensation’s role in helping you achieve your financial goals.
To Avoid the potential of Accidental Insider Trading, Use a 10b5-1 Plan
A 10b5-1 Plan allows “insiders” of publicly traded corporations to set up a trading plan for selling their stock. The Securities and Exchange Commission (SEC) established these plans in 2000 to help people act in accordance with insider trading laws.
10b5-1 Plans layout a predetermined number of shares you can sell at predetermined prices and time intervals. In addition, these plans also specify a formula or key metrics given for determining the amount, price, and date. An understated benefit is that once established, participants don’t have to worry about blackout dates or trading windows.
How We Can Help
Wingate Wealth Advisors specializes in equity compensation planning & 10b5-1 Plans. Our team can help you answer questions about your own concentration risk and create a plan that allocates the right amount of your portfolio to your company’s stock and other external investments.
We have extensive experience and knowledge about the various types of equity compensation (ESPPs, RSUs, ISOs, etc.). Our goal is to help our clients make the most informed decisions while considering their entire financial picture—achieving life goals, investment risk reduction, tax implications, legacy impact, etc.
We understand insider trading rules and the various strategies companies use to allow their “insiders” to reduce their positions legally with 10b5-1 Plans.
The software that we use to analyze executive equity compensation can incorporate 10b5-1 Plans and the restrictions in those plans. By being proactive, we can help our clients make informed decisions and consider the various risks in designing a sale strategy within the framework of a 10b5-1 Plan.