Executives who hold a large proportion of their overall wealth in an executive share scheme (ESS) need to be aware of the potential disadvantages of being in a ‘top heavy’ financial position.
For executives whose ESS may account for the majority of their wealth, it is important to understand the risks and implications associated with a fall in share price and reduced dividends, particularly if they were to coincide with a job loss.
Here we outline how to diversify, balance and strengthen your share portfolio.
Many executives, including those in mining and resources, work in pressurised and demanding environments and by their own admission, don’t have the time to make sound financial decisions about their ESS and consider implications that may affect their future financial security or retirement plans.
This lack of time to take action may result in failing to harness the full benefits of your income and share schemes. Just as importantly, remaining unaware of the potential problems associated with an undiversified investment portfolio and ‘top heavy’ ESS interests can have significant impacts on your current lifestyle and future wealth.
Executives with share schemes that represent a large proportion of their wealth run the risk of having not only all of their income tied to the company they work for, but also having their financial independence and lifestyle outcomes tied to the performance of the company share price and dividends on these shares. If you are in this position, a fall in share price or decrease in dividend, could have a significant negative impact on both your cash flow and current lifestyle affordability.
Further issues may arise if your ESS portfolio lacks diversity.
The very nature of an ESS is that the majority of the portfolio is tied to a single company’s shares (the company you work for). Fluctuations in those share prices could have negative consequences similar to those outlined above.
We are sure you have heard the saying ‘expect the unexpected’ and it is particularly relevant when it comes to planning your financial future. Albeit a dismal thought, considering worst-case scenarios provides opportunity to implement financial protection measures.
For example, what if a drop in share price coincided with a reduction or loss of income?
This situation would result in lower or no employment income, lower dividends being received, or your being forced to sell shares for a depressed price.
It is common for executives in all industries to have an undiversified approach to their portfolio, with their ESS accounting for several million dollars in both vested and unvested shares. Their ESS often represents a large portion (the majority in some cases) of their overall wealth, and that can create significant risk to their future wealth and prosperity.
If you are in a similar position, it is important for you to understand and accept, that the impacts of volatility in share price affecting your ESS may cause significant compromises for your lifestyle now, your plans for retirement in future and any financial legacy you may be planning to leave family members and other beneficiaries.
Your next step…
Seek strategic ESS advice
Under the co-leadership of financial advisers Brett Cribb (a former mining engineer) and James Marshall, Stratus Financial Group offers specialised executive share scheme (ESS) advice and services.
Depending on individual circumstances, strategic and tailored ESS planning may include having a long-term plan to move to a diversified portfolio, with a considered sale of some ESS shares at predetermined price points. This could allow the sale of shares and re-investment of proceeds to achieve a more diversified, and therefore more balanced, portfolio of assets.
Working with derivatives experts, we can also arrange mechanisms for protecting an ESS portfolio in the event of a significant fall in share price, without the requirement for you to sell shares. Such downside protection aims to alleviate the need for selling shares in a depressed market for the purpose of funding your lifestyle.
While share options and share schemes can offer significant potential benefits for mining and resources executives, they are not without risk. The key is proactive ongoing management, coupled with understanding taxation implications to make the most of your ESS and wealth opportunities.
To discuss our specialised ESS advice and services, please contact Brett Cribb or James Marshall on +61 (0)7 3007 2007 or emailing info@stratusfinancialgroup.com.au
Further Reading/Viewing:
Resources Unearthed Executive Share Schemes
Video: Key Considerations for your Executive Share Scheme (ESS)
Stratus Financial Group helps families, professionals, executives, business owners and retirees manage their complex financial affairs and coordinate their professional advisers.
Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. This is general advice only and does not take into account your objectives, financial situation or needs, so you should consider whether the advice is relevant to your personal circumstances. You should also read the relevant Product Disclosure Statements (PDS) before making any financial decisions.
