Protecting client wealth Imagine yo...

Protecting client wealth Imagine you have a client who's accumulated a large stop of company stock serving as an executive for XYZ Inc. Now that he's retired from the company, his position is worth several million dollars. Understandably, your client is onward top of the world. He's made it. He's rich.

You, however, diocese things a little differently. The lack of diversification in your client's portfolio makes you a little anxious. Should anything make progress wrong at XYZ, your client's unadulterated worth could suffer. On the other hand, an outright sale of XYZ stock could generate a significant tax bill, to say nothing of unwanted publicity. Something neither of you wants.

There is a solution to this dilemma. Specialized equity monetization strategies can help your high-net-worth (HNW) clients assured wealth, diversify their portfolios, and put off taxes all at the same time. For you, as it was structures offer a way to add tremendous value to client relationships. calm if it's beyond the sweep of your practice to facilitate as it is transactions, simply explaining them to clients can strengthen your attraction with them and cement your character as a trusted professional advisor.

What is equity monetization?

An equity monetization strategy allows a client to receive cash for a large shape of publicly traded stock without officially selling the stock. That cash can then be used to build a well-diversified portfolio of equities-a portfolio inherently more sure than a portfolio based onward a single stock position. Because the transaction is structur as a loan, it does not trigger any tax.

According to Andre Barrett, CA (Ontario), CFA, executive director of equity-structured performances at CIBC World Markets, this strategy is well known in the United States and is quickly gaining popularity here. Barrett attributes the increased interest to the stock market volatility of the past hardly any years. "We get a doom of calls from clients we spoke to several years ago," he admits. "After suffering between the sides of the bear market of the last married pair of years, these same clients are now looking to preserve themselves." As Barrett points without equity monetization is as frequently about managing a client's emotions as it is about managing the portfolio. Simply enjoin a concentrated stock position can incite investors to take risks they shouldn't. "They become married to the position," Barren says bluntly He admits it can be difficult to persuade any HNW individuals to divest themselves of a stock that has made them rich. many times it takes careful persuasion to convince them to do something differently. "I frequently say to people, 'You're right-the way to gain farthest wealth is by taking most distant risks. But for everyone who come afters there are hundreds who fail. It's not worth the risk.'"

Structuring equity monetization

Equity monetization can be structur in a number of different ways. united popular method is the forward sale. This strategy uses a customized derivative contract to "lock in" a selling price forward a maturity date three, five, or seven years in the what is yet to be Once the lock-in price is agreed to, the lending institution provides a loan of 90% or more of the lock-in price. As Barrett explains, the without deductions result is the elimination of any economic outlook to a large block of shares upon a tax-deferred basis. As an added benefit, interest payments are built into the contract itself, meaning clients don't have to find payments from outside sources to supply the loan.

A variation of this strategy is the range-forward sale. Instead of a single lock-in price, the lender plants a price range with a floor and ceiling. If on maturity the stock is trading within the agreed-upon range, the client will receive the market price for the shares. If, forward the other hand, the stock is trading above the ceiling or below the floor, a cash payment according to either the lender or the client will be required. (Under either configuration the client can settle their obligations beneath the loan and forward contract through a cash payment or a delivery of shares.) Barrett says like deals are very popular with HNW clients who remain bullish in succession their stock, even though they recognize the ne for protection.

An equity monetization example

Real-life examples make the benefits of equity monetization clear. Several month ago, Barrett met with a senior executive of a Canadian company. The executive was looking to divest himself of a large shut up of company stock. Barrett provided sum of two units possible structures for the client's consideration, the first of which was a simple five-year forward sale:

Number of shares: 40000

Current stock price: $65 for share

Current value of holding: $26 million

Term: 5 years

Forward price sale: $7572 (1165% of instant stock price)

Loan advance: $5928 through share (91.20% of current price)

Proceeds: $2.37-million

Annual interest rate: 501% (zero interest warrant structure-no interest payments for the space of time of the contract)

Because the client was comfortable taking in succession more risk, Barrett also propos a range-forward sale structure:

Number of shares: 40000