Monday Morning: Options offer opportunities for advisers

Senior corporate executives have reaped hundreds of millions of dollars of wealth during the past 15 years by exercising large options grants they received as compensation.

Many lower-level employees at Silicon Valley companies also got rich by exercising options they received during the Internet bubble.

But many more workers, with the right advice, could have shared in the options bonanza of the 1990s. Unfortunately, many of them let the opportunity pass.

Close to 1 million U.S. households let in-the-money options expire during the past three years, according to a study conducted by a research group for Fidelity Investments. Another 1 million declined to accept options grants.

These are frightening statistics, since hundreds of millions, perhaps billions, of dollars of potential wealth were allowed to flow down the drain. Why did this occur?

According to the survey, 53% of the respondents said it was because they didn’t understand how to exercise the options, or found the plans too complicated.

Of those who did exercise their options, just 39% did so because it was a good investment move. Many took action because they needed the money, or their options were about to expire.

Also, just 39% of those still holding unexercised options say they have a strategy for exercising them.

Fidelity Investments in Boston commissioned the study in support of its Fidelity Stock Plan Services, a unit it established in December 2000 to help corporate clients support their options and stock purchase programs for employees.

The mutual fund giant now has stock-plan relationships with 50 companies representing more than 700,000 employees.

The study reported that as of April 2002, there were an estimated 4,000 broad-based stock options plans and between 8 million and 10 million participants in stock options plans. And there were as many as 4,000 stock purchase plans, with 15.7 million participants.

Not surprisingly, 74% of stock options plan participants and 76% of stock purchase plan participants considered themselves not very experienced or not at all experienced investors. Clearly, many corporate employees at all levels need advice about stock options grants and stock purchase plans.

This is an opportunity for financial advisers to increase their value to clients and potential clients. How many advisers even think to ask clients or potential clients if they receive options grants or participate in stock purchase plans?

Judging by the Fidelity study, if an adviser doesn’t ask specifically about such plans, most clients won’t think to mention it.

The study showed only 10% of options or stock purchase plan participants regarded them as part of compensation. Most regarded it as an employee benefit or perk.

Obviously, Fidelity Stock Plan Services plans to fill the information and service gap related to stock options and stock purchase plans.

But even Fidelity can’t service all the plans and all the individual plan participants, which opens the door for advisers.

Advisers can step in when individuals need one-on-one planning and guidance on their participation in such plans. In particular, advisers can give one-on-one guidance on the intricacies of stock options and especially the tax complications that often accompany them.

Of course, that assumes advisers are up to speed on options themselves.

Mike Clowes is editorial director of InvestmentNews and sister publication Pensions & Investments.