Employee millionaires will need assistance with tax, planning basics

Young, tech-savvy and now fabulously wealthy, many Facebook Inc. employees are missing only one thing — a financial adviser.

“One of the challenges with these Facebook employees is finding an adviser and connecting with them,” said Sabrina F. Lowell, an associate adviser at Mosaic Financial Partners Inc., who works with a young Facebook programmer.

“A lot of what I’ve done has been about basics: how to manage and track your cash flow, and build credit,” said the adviser, whose firm manages $450 million in assets.

Depending on their vesting schedule, Facebook employees won’t be able to access their shares for at least six months, so advisers already working with employees expect them to stay put for the time being. But in the months leading up to Friday’s initial public offering, advisers were discussing the potential change in the capital gains tax that many employees will face if they sell their shares.

Robert M. Cheney, founder of Westridge Wealth Strategies, an affiliate of First Allied Securities Inc., has been looking for capital losses to help offset the gains that his Facebook employee clients will pick up.

He has sold off some European and emerging-markets investments as a way to harvest losses and mitigate the capital gains tax bite, and has invested in private oil and gas partnerships.

“Drilling and exploration partnerships provide tax advantages that each client will want to review with their accountant,” Mr. Cheney said.

Facebook stocks make up the lion’s share of these clients’ investment holdings, advisers said, so diversifying their portfolios will be an inevitable part of the planning process.

James Knight, chief operating officer at Vista Wealth Management, noted that the firm has a program that systematically sells a client’s highly concentrated holdings over time.

The firm works with employees of many high-tech companies, including Zynga Inc., which recently went public.

“When you systematically sell at different periods, it takes the emotion out of it,” Mr. Knight said. “We’re telling clients that they’ve made their wealth in this stock, and now we want to protect it.”

Proceeds go toward diversifying the client’s portfolio.

It is also a plum opportunity to ensure that these clients are maxing out their 401(k) contributions and making nondeductible individual retirement account contributions that eventually will be converted to a Roth IRA, Ms. Lowell said.

“Many of these kids in their 20s aren’t even utilizing their 401(k)s, but they’re high earners,” she said.

Saving for short- and intermediate-term goals is another important topic.

“Determine the income needs of the client and set aside cash for a rainy day to cover three to six months of living,” said Alan Zafran, a partner with Luminous Capital, a registered investment advisory firm with about $5 billion in assets.

Facebook employees will want to sock away some money for other expenditures, including taxes or a new home, he said.

Finally, though it may be hard for young clients to visualize what they want to do in the future, advisers may want to discuss their goals aside from retirement, including the reality that a million-dollar windfall may not be sufficient to keep a 25-year-old employee afloat into old age.

Kyle Ryan, executive vice president at Personal Capital Advisors, noted that typical Monte Carlo simulations may not apply to Facebook employees, who are so young, and that their new wealth effectively accelerates the retirement conversation that advisers typically have with investors who are in their 50s.

“If you are in your 20s and 30s, and you live to be 90, your windfall — even if it’s in the millions — might not be as much as you think if you’re not going to keep on earning,” Mr. Ryan said.

— Davis D. Janowski and Andrew Osterland contributed to this story.
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Related Topics: Initial Public Offerings (IPO)