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If you’re a startup employee looking to bring on a financial advisor for the first time, or change advisors, it’s important to remember that not all financial advisors are created equally. Some specialize in financial planning (e.g. tax, insurance, education, retirement, and legacy planning), while others focus more on investing (e.g. asset allocation, portfolios, funds, and returns). Ideally, you want a financial planner who understands both the planning and investing side, as well as stock options.
Your advisor should have the experience and knowledge to help you think through your own goals and make decisions that create flexibility and position you to achieve your financial goals. Your advisor should be able to tell you things you should do — but also the things you shouldn't.
Below is a list of five questions to ask your financial advisor before deciding whether they’re right for you. We’ve also included guidance for the types of answers to watch for to make sure the advisor not only understands financial services and has your best interests in mind, but also knows his or her way around equity planning.
Fiduciaries have a legal duty to act in the best interest of their clients. What does that mean? For example, let’s say your financial advisor also sells insurance. If he were not a fiduciary, he could try to sell you an insurance product that you might not actually need, but that would make him extra money.
Fiduciaries don’t earn commissions on the products and services they suggest, and thus don’t have a financial incentive to recommend products that don’t work for your financial situation.
This is a nice way of asking whether the advisor gets paid commission for selling any products. A fee-only advisor only gets paid when you do well, as they are compensated by a percentage of your Assets Under Management (AUM). Advisors who are not fee-only also get cuts of the products they sell you, such as life insurance products.
This language can be tricky, so don’t be afraid to ask the hard questions. Even “fee-based” can imply the advisor still gets some commission. Ideally, you want your advisor to get paid when your investments do well, not for selling you a product.
If your financial advisor has his or her Series 63 or is a Certified Financial Planner (CFP®), that’s a good sign. Both of these designations mean that the advisor is legally bound to serve as your fiduciary and therefore must work in a fee-only capacity.
Ask the advisor for references of other people who had similar financial situations as you. Can they point to a specific case study of how they helped someone else navigate employee stock options?
Most financial advisors understand how to manage risk, but risk management for stock options is a breed of its own.
There is risk at every stage in the employee equity journey, meaning the advisor has to know how to help you address risk exactly where you are now — as well as in the future. They should be able to present you with risk/reward equations, analysis, and informative discussions to help you make the right choices for you and your family.
Ideally, your financial advisor will say, “Let me give you an example of how I helped someone and what their scenario was.” It’s less about the exact outcome, and more about them demonstrating to you they understand the process.
If you hear something along the lines of, “I’ve told all my clients, never exercise before an IPO” or “I only do cashless exercises,” that’s a red flag. Your advisor should have a nuanced view of employee stock options, so they can help you build a comprehensive exercise plan long before you’re ready to exit.
If you’re a startup employee earning equity, you need an advisor who knows equity. Your equity comp plan is not the same as one for a Coca-Cola exec, and your advisor should know the difference. They should already understand the nuance between if you’re employee $1,000 at a Series D startup, vs. an employee working for a friend’s pre-seed company.
For example, financial advisors should have a firm grasp on the annual AMT cap, and (at a minimum) explore with you whether it makes sense to exercise your incentive stock options under the AMT cap each year.
If you want to own shares in your startup, there can be significant financial benefits to exercising under the AMT cap each year. Where does that strategy fit into your other investments, like your 401(k), and traditional retirement account?
Bottom line: your financial planner should know more about employee stock options than you do. They should be asking you the right questions to understand your true risk/reward situation.
The answer to this question should be, “Yes!”
For many startup employees, the majority of their net worth is tied up in their equity. If you’re not putting that in your plan, you're not being well served by your financial advisor who doesn’t understand that it’s part of your net worth.
If your advisor says, “Once it’s worth something, then we’ll put it into your plan,” they might not be the right financial advisor for you. If you’re earning employee stock options that you’d like to own, that should be part of your financial plan, alongside all of your other financial goals.
Your equity is part of your net worth. If an advisor isn’t considering your equity part of your net worth now, they could be doing you a disservice by not allowing you to get the most out of your stock options.
That said, financial advisors aren’t magicians. No one has a crystal ball that shows them exactly what the markets will do or how companies will perform. Your advisor is there to help coach you, make decisions for your future, and ultimately keep an eye on all aspects of your financial life — so you don’t have to.
An advisor who understands employee equity can look at all those things in aggregate and check those nooks and crannies for you. If you’d like to meet with an advisor about these questions or any other equity-related concerns, feel free to reach out.