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The
typical financial advisor who helps his or her clients develop a
plan for exercising employee stock options charges nothing for the
service. Or at least this is the conclusion that might be drawn
from the results of Net Worth Strategies' June 2001 survey of its
StockOpter© users...but it would be incorrect.
 At
first glance, the survey suggests that 28% of all respondents charge
nothing to do options planning, 27% charge hourly fees, 13% charge
a fee per engagement, and 16% charge for planning as a part of annual
retainers or percentage-of-asset under management fees. However,
the vast majority of those respondents who said they don't charge
for option planning are really folding those charges into a percent-of-asset
management fee structure. Modifying the survey results for this
fact, it's now clear that about 39% of the respondents charge asset
management fees and do option planning as part of that service,
while only about 6% say they either don't know what to charge, or
provide the planning as a free service accompanying the sale of
insurance or investment products.
 We
asked Christopher D'Orsi, half of the Prudential team of Lerner
and D'Orsi in East Brunswick, NJ why he responded that he charges
nothing for options planning. "Because," says D'Orsi, "we offer
this advice as part of our fee-based asset management platform."
D'Orsi and his partner, Neil Lerner, manage about $145 million in
assets of clients for whom they do comprehensive financial planning.
Among those clients are a fair number holding stock options worth
between $600K to $1 million before taxes. As to what he charges,
D'Orsi says "Prudential has different wrap platforms, all having
a different range of fees....our fees may range anywhere from .50%
to 3% depending on the type of wrap account, asset class mix and
account size.
One
of the advisors who responded to the survey by saying his firm includes
options planning as part of their total package of services -- and
attendant fee structure -- is Roger Shake, CFP of the Legacy Consulting
Group in Plano, Texas. Shake explains "Legacy is a wealth management
firm doing fee-based, comprehensive, multi-generation financial
and life planning for 47 families." His firm charges a flat fee
of anywhere from $4,000 on up for a client's initial financial plan,
and ongoing fees that are a combination of percentage-of-assets
for portfolio management and quarterly retainer fees for financial
planning.
 Depending
upon when the client's options enter the picture, the planning for
those options will be charged under one or another of these established
fee structures. For example, if the client has options the first
time he walks in the door, then planning for those options will
influence the flat fee Legacy quotes the client for his initial
planning. However, if the client is beyond initial planning, is
receiving ongoing service from Legacy, and is suddenly awarded options
by his employer, then the option planning will be covered by his
quarterly retainer fee, which could range anywhere from $500 to
$7,000.
A
similar system is used by Leisa Brown Aiken, CFP, CPA, an employee
of Kabarec Financial Advisors, Ltd. in Palatine, IL. Kabarec, a
fee-only advisory firm, quotes a flat fee for a client's initial
planning and then switches to an asset management fee as the client
continues to receive services from the firm. "We'll do a separate
fee initially for financial planning and then offset part of the
planning fee against the percent-of-assets fee charged later in
the year if they become an ongoing client," says Aiken. The existence
of stock options in the client's financial makeup is one of many
possible factors that determine the planning fee Kabarec quotes
to its clients. But typically, says Aiken, "a more complex options
analysis that we would use StockOpter® for might run six hours at
about $200 an hour." In other words, the financial planning fee
Aiken would quote a new client with options would include this $1,200
element.
 However,
Aiken says "we wouldn't do just a stock option planning exercise,"
a sentiment that Shake agrees with. And that's what it may seem
is happening with the 40% of the survey's respondents who say they
charge either hourly or per-engagement fees for this type of planning.
These fee structures suggest that the planning is being done in
a vacuum, but that's not always the case, according to Chris Berg,
CPA with Top Murphy & Company LLP in Portland, OR. Berg charges
clients with stock options fees of approximately $115 to $165 per
hour, saying the total engagement usually costs the client near
the higher end of a $2,500 to $5,000 range.
Berg
considers the client's complete financial picture, in spite of his
tendency to charge hourly fees for a specific stock option planning
engagement, by bringing in an independent (usually fee-only) financial
planner as part of the team. "Typically what happens is I'll use
StockOpter® and do some projections which the financial planner will
use as input [to his planning efforts]," he says. So, between Berg's
service and that of the financial planner, the client gets comprehensive
advice. This works as well as it does because Berg poses no threat
to the planner since he's not an asset manager and, he says, "many
planners in our area don't want to get into the complexity of options
planning, so they'll rely on the work we do...it's a team effort."
 Among
advisors who charge hourly fees, or base their engagement fee on
an hourly rate, Aiken and Berg are in the majority as to the actual
rate used. Nearly half of all advisors relying on an hourly fee
charge between $150 and $200 an hour. Of the remainder, approximately
half charge less and half charge more, ranging from somewhere under
$150 to as much as $300 per hour or more. Berg's fees are a blend
of the rates applicable to the different personnel within his CPA
firm that actually do the stock option analysis so, for less complicated
cases, his average hourly fee might slip below the $150-$200 range
since less-costly employees can be used to a greater degree than
their more expensive counterparts. Berg's total engagement fee (time
multiplied by hours) is also in the majority of those who charge
flat fees per planning engagement, as nearly three-quarters of all
respondents of this type say they charge $1,500 and up.
Net
Worth also asked its users about the average value of their clients'
stock options. Surprisingly, even with the market correction that
has taken place over the last 15 months, values were sometimes considerably
above the highest level postulated in the survey, i.e., $1.25 million.
Twenty-nine percent of respondents reported the average worth of
their clients' options to be more than this amount. Another 24%
said clients' options ranged in value from $750,000 to $1.25 million.
And the other half of the respondents fell more or less evenly in
the $500,000-to-$750,000, $250,000-to-$500,000 and below $250,000
groups.
 This
is reflected in the experience of those advisors we spoke with as
well. Shake said the average pretax value of his clients' option
holdings range from as little as $500,000 to his highest of $9.5
million. D'Orsi cited a range for his clients of $600,000 to $1
million. Aiken didn't offer specific values, but noted that there
is a wide disparity in the experiences of their option-holding clients.
In their area, they encounter clients with options in companies
like Walgreen, which have lost some value, Motorola, which has lost
tremendous value and, on the other hand, health care or pharmaceutical
companies, whose stock values may have done quite well over the
last year.
The
percentage of an advisor's clients holding options is also interesting
to note. While not a question on the Net Worth survey, it is obviously
a reflection of the overall makeup of an advisor's client base.
For example, Aiken, who says 37% of Kabarec's clients are retired
folks, estimates 15% of the overall client base is holding options.
Shake reports that among their 47 family clients, about 30% hold
options.
Also
not questioned by the survey is the likelihood that stock option
planning will lead to other work, thereby increasing the overall
fee to the advisor. This perhaps most commonly applies to practitioners
charging on an hourly basis since they start out with the most limited
scope of engagement, and therefore have more potential to expand
the scope. Berg reports that, as part of the options planning process,
he requests prior-year tax returns from his clients to be able to
observe the effect of past option exercises on their taxes. In doing
so, he says "something's often wrong, to their benefit or not."
Berg
finds he can extend his services in three different ways. First,
clients are simply disorganized for tax purposes, and he can help
them get their records in order. But perhaps more important, the
opportunity to review prior year returns allows him to find mistakes
requiring return amendments which can not only increase Berg's fee,
but often put money back in the client's pocket. Last, he finds
that clients who have already exercised options don't know the correct
tax basis for each group they've exercised (probably due to that
state of disorganization mentioned earlier), so Berg helps them
straighten it all out.
It
seems clear that there are as many different ways to charge for
stock option planning as there are ways to charge for financial
planning, in general, since one is usually a subset of the other.
While the Net Worth survey doesn't necessarily point out advantages
to one fee structure over another, it should be very helpful to
StockOpter® users in knowing what to charge for this valuable service
in the context of whatever fee structure they're already using.
About
the Author
David
J. Drucker, MBA, CFP, based in Albuquerque, NM, has been a fee-only
financial advisor since 1981 and now writes on practice management
topics for other professionals.
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