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Why executives should think twice before investing in their companies

Investing in your own company may seem wise but may be risky


As an executive, you deserve to be compensated based on your performance. Executives of most public (and some private) companies are often required to maintain specific ownership in the company to show their commitment and ensure they are invested in positive outcomes for shareholders. However, all too often, executives feel this pressure and invest much more than the required amounts. As a result, the investments individuals make in their company may be in conflict with their personal financial plans.

Investing in your own company may seem wise; after all you know how your company operates better than any other. However, you begin to increase your risk when you hold a concentrated position. In the event that something happens to your company, your whole portfolio could be severely impacted. By diversifying to a portfolio with multiple stock investments, you can reduce your risk.  

For example, in some privately held companies liquidation of stock can be a problem.  Here in Colorado, employees of CH2M are finding it difficult to retrieve their retirement savings due to limits the company has put in place on sales of the stock. This is not a risk most people can afford to take.

I had one client share that he was comfortable investing more in his employer because he knew the value of the company and felt it was much higher than the market recognized. The problem with this thinking is that if the market does not recognize that value, you will never be able to achieve the perceived return. With a higher level of uncertainty in the return on investment, the client would actually need a much higher return to offset the risk.

Many employees of public companies want to take advantage of employee stock purchase programs that allow them to purchase the stock at a discount (e.g., to purchase at 80 percent to 90 percent of the current price.) If you do this, make sure you set up a plan for liquidating these shares after the required holding period so that you don't add to your concentration.

Also, you may want to consider taking the dividends in cash. For every share you purchase through dividend reinvestment, you have to track the basis so that you can properly report the capital gain or loss when you sell the shares. These small purchases can be hard to track and you are taxed the same whether you receive the dividend in cash or reinvest it.

I advise my clients to maintain the minimum required investment in their own company. It is important to avoid continued investment as further awards are granted over time and to set up a schedule to liquidate investments in accordance with corporate policies.  Most companies allow systematic liquidations of stock through 10b5 plans which comply with the SEC's insider trading rules.

Generally speaking, I strongly recommend individuals work with their financial advisor to understand the risk of their required position when it comes to investing in their own company. What would happen to your financial plan if your company’s stock decreased by 30 percent or 50 percent? Can you recover with your other investments? You may think this scenario is unlikely, and we hope that it is, but these situations do occur. Especially when it comes to investments for your retirement, it is important to avoid excess risk.  For all executives and employees, make a plan to discuss your investments and corporate stock options with a financial advisor so you ensure your hard earned dollars are invested with best chance of minimizing risk and maximizing your return. 

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Stephanie Bruno

Stephanie Bruno is a Certified Financial Planner, a Certified Private Wealth Advisor and an Accredited Investment Fiduciary. At Stephanie Bruno Wealth Advisor, she helps clients understand their relationship with money so they can improve the impact of it in their lives. In addition to expert financial planning and world-class investments, she works with clients on the human issues around money. Bruno has more than 25 years of planning, investment management life coaching experience to share with her clients. For more information, visitwww.sbrunowa.com.

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