One client, a corporate CEO, had a very high net worth at the time he began with us, but virtually no liquidity and woefully little diversification. His portfolio consisted primarily of just two assets:

  1. He had been aggressively deferring his bonuses and a portion of salary into the company deferred compensation plan. It offered only two, relatively unattractive investment choices.
  2. He also had a very heavy company stock option position and many shares owned outright.

In discussions with the client, we learned that he actually felt "poor," having so little cash and no accessible after-tax portfolio. He was also feeling vulnerable at having most of his assets tied to his company. Finally, he had a strong desire to benefit charity at some point.

Our major recommendations were three-fold. First, we had him stop further deferrals. His existing accounts easily funded retirement living expenses. Moreover, the income distribution from them would place him into the maximum marginal income tax rate upon retirement. In short, he could no longer exploit any difference in taxes on a bonus postponed to retirement rather than taken now. In fact, with any later change in law, his tax rate in retirement could actually be higher than currently.

Second, we set an investment allocation for the excess net cash flow he would now realize by taking his bonus and salary in full. Our recommended portfolio was specifically designed to improve his liquidity and diversification. The investments were prescribed taking into account his existing heavy stock market concentration from company options and his allocation among the two funds in which he had his deferred compensation.

Third, we dealt with his company stock concentration. A limit to it was set at 35% of overall investment assets and implemented by filing a Rule 10b5-1 agreement with pre-specified exercise prices for his non-qualified stock options. To enable him to satisfy his later philanthropic goals, we created a program for exercising incentive stock options by tender of shares he already owned outright. That produced zero-basis stock (i.e., shares consisting entirely of capital gain) for later donation to charity. Exercising ISOs in this manner also de-levered his company stock holdings somewhat, helping to control his exposure.