The Difference between RSU's and Stock Options

If you work in today’s big technology industry, it is very likely that you are getting some form of stock based incentive, as part of your compensation. The two most common forms of compensation are restricted stock units (RSUs) and stock options. These two programs both offer very nice incentives for employees, but they are slightly different, and should potentially be treated differently. Also, any time that you hold some form of company stock, you should view your exposure to the company from a holistic perspective, to your overall portfolio.

What is an RSU?

RSUs, are awarded to employees at some date, and typically have a vesting period at some point in the future. Often the vesting will be 25% at the current date, and 25% in one year, 25% in 2 years … etc. At the time of vesting, the company buys a share, and gives it to you. In this way, it is much like a cash bonus. And like cash bonuses, the company will withhold taxes at that time of vesting (commonly, they will just keep shares from your award).

For example, you just received 100 RSU’s that have vested. The company stock is $1. You will received 100 shares of your company at $1 = $100 of compensation. Assuming you are in a 25% tax bracket, the company will hold 25 of your shares. Which means you net out 75 shares.

What do you do with an RSU?

You have 2 options with RSU’s … you can either sell them immediately or hold them. If you sell them immediately, since you just paid the taxes on them, and they likely have not appreciated much, you will not have to pay any capital gains taxes, and you will just receive the cash. if you decide to hold them, and they appreciate, then you will have to pay the capital gains on them.

One major advantage of RSUs

They almost always have value, even if the price of the stock has dropped. For the certainty of that value, RSU are commonly deemed more valuable than stock options. Which brings us to …

What is a stock option?

A stock option, gives the holder the right to purchase a stock in the future at a predetermined price. Like RSUs, options are given out as performance incentives, and typically have a vesting period.

For example, you have the option to purchase your company stock in 1 year’s time at $1. If the stock goes up $1.50, then it would make sense for you to purchase the option at $1, because you would have a built in .50 return. If the stock dropped to $.90, you would not exercise the option, b/c you would be better off to buy it on the market for $.90 than through your options at $1.

**Note that exercising the option is a purchase, but not a sale. Which means that you will not pay any taxes at the point of the exercise. You will only pay taxes upon your sale of the stock.

What do you do with an option?

You should have no more than 5% of your portfolio in single stock.

You can either sell it immediately and pay the capital gains equal to difference b/w the current price and the price at exercise. Or you can hold it. There are advantages to holding it for greater than a year, since you will pay the long term capital gains tax (as opposed to short term capital gains, assessed at your ordinary tax rate).

Advantages of options

You have greater control over taxes with options, since you decide when to sell them (and thus when to pay taxes on them). And since they are riskier, companies typically give you more options.

How do options and RSUs play into your overall portfolio?

Most people just let both their RSU’s and options sit and collect over time. They don’t manage them, they don’t sell them, they don’t really think about them until they move to another company, or they grow big enough to force a conversation. This is a BIG problem. From a simple portfolio diversification perspective, you should have no more than 5% in single stock. And your vested options/RSUs are part of your portfolio. If you have 100k sitting in RSU’s or options from your company, you are very likely way over-allocated. Second, you already have plenty of exposure to the results of the company. Just check your bank account every other week, who is making auto deposits?

If you have “new” RSUs just sell them, you won’t (likely) have to deal with any major tax consequences. If you have older RSUs then you will need to check for capital gains exposure, and make sure you factor that into your savings for next year. Since you had to exercise your options, that means, that very likely you have some major capital gains exposure. So beware, when you sell them.

After selling them, increment into a low cost ETF, rinse and repeat next year.

2 New Apple Products That Could Save You Money

Apple held its annual spring event at its headquarters in Cupertino, California, on Monday, March 25th. Two of their new products are particularly interesting from a personal finance perspective and could save you some money.

Apple News+

I am an apple snob and stockholder.

We have too many apple devices in our household.

Apple News+ is a new service that allows you access to a large number of magazines and newspapers, as well as their standard news content. This comes at a set monthly subscription rate of $10/month. At first blush this seemed like an interesting deal for $120/year. I’m skeptical of monthly subscriptions but I love magazines, and I get my news mostly from The Wall Street Journal and The New York Times. So I figured I would run a quick audit in our house to see how much we spend on annual new/magazine subscriptions. I used magazines.com to determine pricing.

• GQ - $20/year

• Bon Appetite - $20/year

• Fortune - $20/year

• The Economist - $95/year

• ESPN the Mag - $30/year

• WSJ - $467/year

A total of $652 in reading material!

Holy crap … I was slightly horrified to realize that total. The vast majority of my reading is on a screen, so News+ seems like a bit of a no brainer for our family. Do you know how much you are spending on this category? Add it up!

Apple Card

I am generally opposed to credit cards as a means to pay for your typical monthly expenses. I prefer to spend out of my checking account, so that I know exactly what I have available. And it forces me not to over spend. When I really want to nail down my monthly discretionary spending, I like to load my weekly cash on the Cash app card. I also think that cash back rewards and sky miles bonus points are gimmicks meant to entice your lizard brain to spend more.

If you decide that you need a credit card, if you travel at all, you will, or that you can control your spending urges, and want to get the cash back rewards. Apples Card is a pretty cool product.

• It is tightly tied to your apple wallet

• it gives daily 2% cash back rewards

• it allows you to control your payment options

• it provides some visibility into you budgeting/category spending

• it gives you a physical version, made of titanium

• there are no annual charges

So all in all the new card (which is not yet available), looks like an interesting product. I am curious to see how things play out when it is available. I like the easy integration with the wallet. And I like visibility it provides for your spending.

*Note that there are currently cards available that offer a nice cash back option. So you don’t have to wait for this card to get cash back.

Why Thanksgiving is My Favorite Holiday

Thanksgiving is almost here! It’s my favorite holiday and features all my favorite things: Cooking, family, relaxing, wine, blazing fires, card games, pies, football and kids running and playing! No gift giving expectations, the weather allows plenty of outside time, and it’s a time to recognize the meaning that your friends and family bring to your life. Thanksgiving! I love every minute of it.

A big added bonus, for me, is that our family tradition is to host. My family comes in from Lake Ocononee and Rome, GA. My in-laws come in from Florida and Connecticut. And I savor the 3 or 4 days of the year that we are all together.

Did I mention that I love to cook and I’m head chef for ~20 people during our Thanksgiving visit? Yes, I cook 3-4 days for 20 people and I still have time to enjoy and savor the time with my family. What’s my secret? Planning. Yes, It’s all about creating a plan that fits our family’s needs, then following through with some hard work, while enjoying the process.

Josh Chamberlain’s Thanksgiving Plan

Saturday/Sunday

• Finalize the menu for the week

• Grocery shop at the YDFM

• Buy beer, wine and bourbon

Monday

• Audrey (my mother-in-law and sous chef) and I check for missing ingredients

• Make another run to the farmers market

• Start the pie dough

• Drink wine and relax

Tuesday

• Brine turkey

• Make pies

• Cook black eyed peas

• Drink wine

Wednesday

• Bake mac & cheese

• Cook greens

• Bake potatoes

• Roast brussel sprouts

• Audrey and I each make a soup for our yearly “Soup Off” (she normally wins)

• Attend neighbors pre-Thanksgiving party

Thursday

• Fry turkey

• Prime rib

• Roast Carrots

• Bake rolls

• Make the gravy

• Make Salad

• Savor the feast

• Watch football

• Drink wine

The kids love to help make whipped cream.

Friday

• Enjoy Leftovers

• Family hike

• Family pictures with Cathy Davis

Saturday

The weekend is only just beginning!!

It’s a plan with lots of room for a wonderful week with family and friends.

*Does anyone see the parallels to financial planning? If you want to talk turkey, contact me.

Happy Thanksgiving to you and your family!

14 Questions to Ask a Financial Advisor Before Investing

A Financial Advisor needs to be someone you can trust, you need speak candidly with them about your concerns, wants and needs. Asking these questions can help you decide if this person is a good match for you and your family.

1. Are you a fiduciary?

Yes. I am a fiduciary. From an SEC perspective, that means I list in my ADV form 2 how I get paid, the services I offer, and any conflicts of interest. Being a fiduciary means more than that to me: I put my clients interests ahead of my own. I work with trusted 3rd parties. I look for the best products for clients, taking into account quality, cost and timing. I don’t take any commission of any sort.

2. How do you get paid?

There are three ways I get paid:

1. Providing financial services on an ongoing basis. Monthly subscription of $125/month.

2. Creating a financial plan ($125/hour approximately 8-12 hrs).

3. 1% of assets under management

   For details on these offerings see Services.

3. What IS YOUR “all in” cost?

In addition to the services I outlined above, you would pay:

• If I am managing your accounts, you would pay $15.95 per trade through my custodian, SSG.

• Standard capital gains/losses on trades

• .04%/year on ETFs (that comes to 40c per $1000/year)

4. What sort of tools do you use for budgeting?

I have a spreadsheet that utilizes a range of custom formulas that makes itemizing expenses, income and savings simple and easy to understand . Additionally, I have a variety of software and tools that facilitate the financial planning process.

5. How Do you deal with security?

My clients security is my top priority and is integral to my business. All of our assets are protected by multiple sets of encryption. Online access to accounts are protected. I use 2- factor authentication when sharing cleint information. Any spreadsheet/worksheet that I use is protected with unique and secure passwords.

6. What are your qualifications?

I work with families in a range life stages. I earned an undergraduate degree in Industrial Engineering from GA Tech and an MBA from Ga State. I passed the series 65 exam.

7. How would our relationship work?

I believe the key to a mutually beneficial long-term relationship is through trust and context. With that context I can better provide useful advice. I believe that meeting 1 time per year is not nearly enough. Our meeting cadence will be determined by my client’s situation as well as the issues needing addressed. My clients call, email and text me as needed and I respond in a timely manner.

8. What is your investment philosophy?

The best long-term results are achieved through creating an asset allocation that is well diversified, that will meet your goals (given your risk profile) and requires continual contributions.

I am not a stock picker. My solutions are data-driven. Historical data shows that the vast majority of stock pickers are not capable of beating their respective indexes, and generally end up with higher administrative fees.

I use low cost Exchange Traded Funds (ETFs). I believe the future will look better than the past, and as such, the best companies in the world, as represented by ETFs, will continue to appreciate over the long-term. I do not worry about the daily variations of the market, which tends to be irrational in the short term.

9. What benchmarks do you use?

The S&P 500 and inflation.

10. Who is your custodian?

A custodian is a company that performs trades and holds your shares. Eg: eTrade, Schwab, Fidelity. The custodian I use is Shareholders Service Group (SSG). They use Pershing a subsidiary of The Bank of New York Mellon, the largest custodian in the world with over $27 trillion in assets under custody.

11. What asset allocation will you use?

The majority of a client’s allocation should be in stocks rather than bonds and cash. Historical data shows that bonds barely keep up with inflation. The key to your future is in purchasing power, which means your money needs to beat inflation.

12. Give me an example of a portfolio you’ve designed AND ANY THOUGHTS ON HOUSING.

Each portfolio I design is specific to the client and their current financial situation, goals and risk attitude. As an example, one family I work with wants to reach their financial goals early. They contribute regularly and are mentally unaffected by the short-term variability of the market. At a high level their portfolio consists of low cost ETFs in an S&P 500 tracker: 30%, Emerging Markets: 30%, Small Caps: 30%, Cash: 10%.

Any thoughts on selling the family home now, and either renting or buying a less pricey house: this comes down to the goals of the family. While its true that many family’s biggest monthly expense, largest asset and largest liability is their home, it’s also true that it is their highest utilized asset. If you live in a house, that fits the size of your family, has attributes that you appreciate and does not cause you undue financial hardship … why mess up a good thing? If that set of “if’s” you cannot answer in the affirmative, and you can find a house that better meets your family goals … well it may make sense to move. As in stocks, I am not a believer in trying to time the housing market. I have heard rumors of friends in Decatur who are considering selling now (at a perceived high), renting for 2 years until a drop, and then buying again. I think thats crazy talk, for at least a dozen reasons.

13. What are the tax implications of working with you?

If I am managing your assets, any transaction sales will have some sort of tax implication, through capital gains/losses. I limit the tax implications by limiting the # of transactions.

14. WHY FAMILIES? WHY PROFESSIONALS?

In my experience the complexities of families deserve an added set of professional eyes administering a solid plan. There are many moving parts to a family, that include the expenses of starting a family, all the way into paying for college and eventually estate planning. More voices from a family generally brings more perspectives, something a trained professional can aid in clarifying.

Professionals are people driven to be really good at job, hopefully a job they love. In order to drive to be the best, many professionals are forced to neglect certain aspects of their lives. I have seen too many extremely smart professionals who have neglected their finances to the detriment of the long-term success of their family. I believe that by relieving families of this variable, we are all working for the greater good.

THE NEXT STEP

If you’re ready to take the next step toward financial independence, I’m here to help. Working together we will develop a personalized financial plan based on your unique needs. Set up an initial consultation.

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