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More
clients now have stock options from their employees. Advisors can
use StockOpter® to configure an options investment strategy.
As
recently as five years ago, most financial advisors encountered
stock options only when dealing with high-level corporate executives
or employees of technology companies.
The
prolonged bull market in equities—combined with an unprecedented
economic expansion in the United States—have compelled employers
to make employee stock options available to a much more diverse
group of employees. Every dot-com has some stockholding employees.
According to Sara Ward at Net Worth Strategies, Inc., 7 to 10 million
non-management people in the United States hold stock options today.
For financial professionals, this situation offers an opportunity
and a challenge.
This
new population of option holders needs to make sense of this new
employee benefit. Few employees understand the difference between
ISO's and non-qualified stock options. Even fewer understand the
tax and investment implications inherent in a given exercise strategy.
A financial planner with knowledge of investments, employee benefits,
and taxes would appear to be the perfect professional to guide a
client through the employee stock option maze.
The
spreadsheet problem
That
financial professional, however, must possess the necessary expertise
to complete the analysis in an efficient, cost-effective manner.
She must explore multiple scenarios. She must analyze the tax and
investment consequences. Finally, she must explain and illustrate
the pros and cons of each scenario to the client. Until recently,
many advisors wrestled with their spreadsheets—not always coming
out on top. The main struggles fall into three areas:
- Spreadsheets
take considerable time to construct and maintain, even for those
with expertise in constructing them.
- Spreadsheet
changes need to be audited because of the interrelationship between
cells.
- Multiple
users run the risk of corrupting the model.
The
StockOpter® alternative
A
company new to the financial planning scene, Net Worth Strategies,
Inc., has introduced StockOpter®, an exciting new product that eliminates
the need to design your own spreadsheets when analyzing client's
stock options. StockOpter® is an Excel add-in. It installs on top
of Excel, thereby allowing the program to make use of Excel's significant
computing power. In order to use the program, you must have a copy
of either Microsoft Excel 97 or 2000 installed on your computer.
If you are using Excel 97, you must also have installed either the
SR-2 or SR-2b patch on your machine. The patch is necessary because
the original release of Microsoft Excel '97 had an "auto recalculation"
bug that could prevent various sections of a worksheet from recalculating.
The
program handles Incentive Stock Options (ISOs) and Non Qualified
Stock Options (NQSOs), as well as restricted stock. Working within
the Excel environment allows users a great deal of flexibility,
because the advisor can manually edit many of the individual cells.
When
you enter the program, you are prompted for the information required
for the calculations, such as tax information, stock information,
and the cash flow account (the cash flow account tracks the cash
impact of stock exercise and sale activities). Once the basic information
is entered, you can enter your client's option grants and begin
to explore various scenarios. StockOpter® comes loaded with a number
of preprogrammed strategies, so scenario comparisons are greatly
simplified. One common strategy that requires a limited amount of
user interaction is optimizing for the number of ISOs that can be
exercised without triggering the Alternative Minimum Tax (AMT).
Although some interaction is required, the program's use of the
Excel goal seek function makes the process relatively painless.
Once
you have done your analysis, you can print out a number of tables
and graphs that illustrate your recommendations and aid in discussions
with your client. You can also graph multiple scenarios on a single
page for easy comparison.
A
handy to-do list
When
you and your client agree on a course of action, you can print a
handy To Do Schedule for the client, which, coupled with the analysis
table, is an excellent written trail of your work. It clearly illustrates
your analysis and recommendations for future reference, should questions
ever arise.
There
is a lot to like about this program. The interface and the output
have a clean look and feel. We particularly like the way the program
displays the AMT cost and AMT credits for ISOs. A judicious use
of color enhances usability.
We
do have a few minor criticisms, but none of them are serious enough
to prevent an advisor from relying on StockOpter® as a tool for dealing
with employee stock options.
- The
documentation could be better. Online help is available, but a
printed manual is still in the works.
- Currently,
you can only input one exercise date and one exercise price per
year. Virtually every user we talked to would like to be able
to input multiple exercises in a given year (the company is aware
of this limitation and plans to address it in a future release).
- The
program cannot automatically account for stock splits. You have
to enter the adjustments in the individual cells. According to
the company, version 1.03, scheduled for release soon, will address
this issue.
- One
bug can occur upon a certain sequence of keystrokes. A workaround
should be available by time you read this, and the bug will be
eliminated in version 1.03.
- A
mechanism to batch print and/or aid in the customization of the
printed output would be useful.
About
the Author
Joel P. Bruckenstein, CFP, CFS, CMFC, is President of Global Financial
Advisors, Inc., a fee-only financial planning and investment advisory
firm located in Pleasantville, NY. Mr. Bruckenstein currently serves
as the President of the Financial Planning Association (FPA) of
the Greater Hudson Valley. Prior to establishing Global Financial
Advisors, Inc. in 1995, Mr. Bruckenstein worked on Wall Street for
15 years, specializing in foreign markets and equity derivative
products.
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