Critical Aspects of Wealth Management: Financial Planning, Investment, and Tax

Wealth management is a comprehensive type of financial advice that is typically offered to individuals with high net worth. Rather than trying to integrate pieces of advice from various industry professionals, it encompasses investment, tax, and the various aspects of financial planning such as retirement, advanced estate planning, and charitable giving in one, holistic plan. A wealth manager will coordinate services necessary to manage their clients’ assets, along with strategic plans to provide for their current and future needs. The specific services provided depend on each client’s individual requirements. Many wealth managers can provide services in any aspect of the field, but it is best to find a wealth manager that has expertise in all areas such as financial, investment, tax, and estate planning.

Wealth management begins with an overall financial plan, which serves as a roadmap to meeting your goals. As with any roadmap, the first step in creating a financial plan is to establish where you are and where you want to go. This involves getting a complete picture of your current finances and clarifying your goals for the future. The most effective wealth managers take a personalized approach, getting to know each client and crafting unique plans to fit their individual vision, priorities, and appetite for risk.

In addition to investment and tax strategies, financial planning can encompass budgeting, planning for emergencies and large purchases, risk management, retirement and estate planning, debt management, and more. The more detailed your financial plan, the better suited it will be to getting you where you want to be.

Once you’ve established the foundation of your financial plan, your wealth manager can begin crafting an investment strategy to help you reach your goals. A successful investment strategy requires a detailed understanding of your finances as well as the risks and potential rewards involved in various types of investment. A wealth manager can help you select appropriate investments, manage your risk of loss, and apply evidence-based investment strategies to grow your wealth.


Once you’ve established the foundation of your financial plan, your wealth manager can begin crafting an investment strategy to help you reach your goals. A successful investment strategy requires a detailed understanding of your finances as well as the risks and potential rewards involved in various types of investment. A wealth manager can help you select appropriate investments, manage your risk of loss, and apply evidence-based investment strategies to grow your wealth.

Before deciding how much and where to invest, it’s important to evaluate how much risk is appropriate in your portfolio. All investments involve an element of risk—some greater than others. Rather than simply seeking to avoid risk, investors must thoughtfully manage it. Higher-risk investments generally provide greater potential for gain, and the return on lower-risk investments sometimes fails to outpace inflation, which can leave investors with diminished value even when their balance has inched up.

There is no doubt that excessive risk in a portfolio can lead to significant losses. A portfolio that incorporates too little risk, on the other hand, may fail to deliver sufficient gains to meet one’s financial goals. Generally speaking, investors who plan to hold their investments over a longer period of time benefit more from a higher level of risk, since they have time to wait out market volatility. Investors who are close to retirement, on the other hand, and will need to start selling investments in the near future, are better served by lower-risk investments. A wealth manager helps clients determine the appropriate level of risk for their investment portfolios based on their individual resources, goals, and timelines.

Risk is just one aspect of an investment to consider before adding it to your portfolio. The performance of stocks, bonds, cash equivalents, and real estate and real estate alternatives tend to move differently, so that when one asset class is struggling, another is likely to be performing well. When you spread your investments across asset classes, you provide yourself a measure of protection against market turbulence.

Just as you want to spread your investments among asset classes, you also want to have a diverse collection of investments within asset classes. For example, if you hold stock in just one company, then your equities investment is exposed to a high risk of loss. By purchasing stock in a variety of companies of different sizes, serving different industries, you can lower the risk of your equities investment.

On the other hand, concentrated stock positions that you gain through your employer’s stock options or grants can provide important opportunities. When deciding when and how much to sell, it’s important to keep in mind your goals, risk tolerance, and tax picture. A wealth manager helps investors determine the best asset mix to help them reach their goals while mitigating risk.

As markets move over time, your portfolio’s balance of stocks, bonds, cash equivalents, and real estate and alternatives will shift, as will the relative value of your individual investments. For this reason, it’s important to revisit your portfolio on a regular basis. This can be done monthly, quarterly, annually, or when asset allocation changes a certain amount (e.g., by at least 5%). Whatever schedule you choose, stick to it, and make sure to check in on your investments and assess the need to rebalance it by selling some investments and purchasing more of others.

Investors can sometimes be unpleasantly surprised by the tax consequences of their investments. Tax management strategies like active tax loss harvesting can allow you to maximize not just gains in the value of your investment portfolio but—more importantly—overall after-tax gains.

ESG investing has become increasingly popular in the twenty-first century. “ESG” stands for environmental, social, and governance factors that are considered when making investment choices. Today, many investment options are available that utilize specific ESG criteria—such as employment equity, environmental standards, and contributions to politicians or special interest groups—to screen investments. By using ESG criteria to select investments, you can make a positive impact in the world while working to secure your financial future.

ESG criteria can be used to create an effective and balanced investment portfolio. A fiduciary investment advisor who is well versed in ESG investing is an invaluable resource when building a portfolio with environmental and social responsibility in mind. A qualified advisor can help you design an investment strategy that addresses your values as well as your financial goals.

There are several different types of employer-issued stock. If you receive stock from your employer, it’s important to understand what type or types of stock you have and the rules that apply to them. You will also want to begin developing a plan for purchasing and selling shares. Because a portfolio that consists mainly of employer-issued stock is exposed to a high amount of risk, it’s critical to have a plan in place to establish balance in your investments.

Lockup and Blackout Periods

When you hold stock in your company, however, you can’t just sell shares whenever you like. Immediately following your company’s IPO, existing shareholders will be subject to a lockup period, during which they are prohibited from trading shares. This typically lasts six months but may be shorter or longer. Additionally, blackout periods, which are imposed quarterly and also prohibit trading by shareholders who have inside information about the company, exist to prevent insider trading or the appearance of it.

There is another way to avoid the appearance of insider trading, however, which allows you to trade shares during blackout periods. You can accomplish this by establishing a 10b5-1 trading plan at a time when you do not hold material, nonpublic information about your company. In this plan, you’ll preschedule specified trades, allowing you greater freedom to maintain balance in your portfolio.


Capital Gains

Often, investment income is subject to capital gains tax. Capital gains tax is levied on the increase in value that is realized when assets, such as shares of stock, are sold. Capital gains are offset by any capital losses, or decreases in value, that are realized at sale. For example, if you realize $100,000 in gains and $15,000 in losses from the sale of various stocks, the difference of $85,000 could be subject to capital gains tax.

The amount of capital gains tax depends, in part, on how long assets are held before they are sold. Long-term capital gains tax applies to gains on assets that are held for more than one year. As of 2021, those rates are 0%, 15%, and 20%, depending on the taxpayer’s income. Short-term capital gains tax, on the other hand, applies to assets held for one year or less. The tax rate for short-term capital gains is the same as the rate of ordinary income tax, which is generally substantially higher than the long-term capital gains tax rate.

Taxation of Gains on Company Shares

Many companies offer incentive stock options (ISOs) to encourage and reward executives and highly valued employees. ISOs represent the right to purchase shares in the company at a discounted price at some future date. This date is typically tied to a certain amount of time in service to the company, another specified milestone, or a combination. When the appropriate milestone (or set of milestones) is reached, then the stock option vests, and the employee can purchase the corresponding shares. If an employee leaves the company with vested ISOs, they have just 90 days in which to exercise them.

At the time of vesting, the difference between the price paid for ISO shares and the current market value (also known as the bargain element) is includable in the Alternative Minimum Tax (AMT) calculation. In some cases, employees can exercise their options early, before they vest, and include the bargain element in the AMT calculation at this time. In this case, the employee purchases the stock even though it has not yet vested and cannot be sold. This carries obvious risk but if managed appropriately, can also result in significant tax savings (more on this below).

While ISOs are available only to employees, companies can also provide stock options to non-employees. Non-qualified stock options (NSOs) can be offered to employees and non-employees alike. Employers sometimes prefer to provide NSOs for their employees because unlike ISOs, NSOs allow employers to deduct the discount that they give on shares as compensation income. On the other hand, NSOs don’t incentivize employee longevity the way ISOs do; employees can hold onto NSOs for up to ten years after leaving the company.

When you exercise nonqualified stock options, as the bargain element is included on your W2 as compensation. At this time, employment and income taxes will be deducted. When you sell the corresponding shares, capital gains tax will apply to any increase in value that you realize.

A restricted stock award (RSA) is not a stock option. Rather, it is a grant of company stock that vests over a period of years. Until shares vest, they are subject to forfeiture. This can happen, for example, if an employee leaves the company before vesting or fails to meet specified performance benchmarks. As RSA shares vest, their current fair market value (minus the price, if any, paid for shares) is taxed as income. When sold, any realized gain on RSA shares is subject to capital gains tax.

Restricted stock units (RSUs) represent a commitment to deliver either a certain number of shares (or, in some cases, their cash equivalent) at the time of vesting. Vesting of RSUs can occur based upon time in service to the company (single-trigger vesting) or upon a combination of time in service and a liquidity event (double-trigger vesting).

Employers withhold income taxes at a rate of 22% for RSU shares as they vest. However, employees earning more than $1 million are subject to a tax rate of 37%. These employees often increase their withholding amounts or make additional quarterly tax payments to cover their additional tax liability.

Double-trigger RSUs are somewhat of a double-edged sword when it comes to taxability. On one hand, delaying vesting until a liquidity event allows employees to avoid having to pay tax on shares prior to IPO or SPAC acquisition; on the other, this can cause all shares to vest at once at a time when employees are prohibited from selling them due to lockup period restrictions. A wealth manager with IPO expertise can help you develop a strategy to meet your tax obligations at the time of RSU vesting.

An employee stock purchase plan (ESPP) allows employees to purchase shares at up to a 15% discount from market value. Shares are purchased with after-tax payroll deductions, which begin on the offering date. Until the purchase date (when discounted shares are actually purchased for the employee) the money that is deducted from the employee’s pay is held in escrow.

When an employee sells shares acquired via an ESPP, the discount they received is subject to ordinary income tax, and remaining gains are subject to capital gains tax. To qualify for long-term capital gains, shares must be held for at least two years after the grant date (the first day of the offering period) as well as one year after the purchase date. Some ESPPs contain lookback provisions, which allows the discount to be applied either to the price at the beginning of the offering period or at the end of the purchase period, whichever is lower. Such provisions can result in deeper discounts for employees as well as a lower amount subject to income tax.

For example,

Price at beginning of offering period: $0.15/share

  • Price of 100,000 shares: $15,000
  • Taxable 15% discount: $2,250

Price at end of purchase period: $0.60/share

  • Price of 100,000 shares: $60,000
  • Taxable 15% discount: 9,000

Tax Mitigation Strategies

Tax planning is a critical part of wealth management. It’s important to develop a strategy to mitigate taxes when possible and be prepared to pay the bill when taxes are due. Below are a few ways that a wealth manager, in conjunction with a tax professional, can help manage your tax burden.

In some cases, employees can exercise stock options or opt to pay taxes on RSAs before they vest. By filing an 83(b) election, you can immediately report as income the fair market value of shares at the time of exercise—or of restricted shares at the time of election—rather than waiting until vesting. This can provide a benefit when the value of company stock increases prior to vesting because it results in a lower valuation of the shares for tax purposes. An 83(b) election also starts the holding period for long-term capital gains and qualified small business stock.

Be aware, however, that exercising stock options early and making an 83(b) election carries risk. While a thriving company’s stock is generally expected to gain value over time, this is never guaranteed. If you elect to pay taxes ahead of vesting, there is always a chance that the stock value will subsequently decline, resulting in a tax payment that is higher than it would be at the time your shares vest. If this happens, you are not entitled to a refund based on your overpayment. Because of this risk, it’s important to get trusted, professional tax and investment advice prior to making this move.

The AMT is designed to ensure that high-income taxpayers pay at least a minimum amount of tax. As such, it requires these taxpayers to calculate their taxable income without excluding tax preference items, such as capital gains on ISOs qualified small business stock. A wealth planner can help you anticipate when you will be subject to the AMT and plan to minimize its impact.

Tax-loss harvesting is the practice of intentionally selling investments at a loss with the purpose of offsetting gains realized from the sale of other investments. An experienced investment advisor can devise an active tax-loss harvesting strategy to minimize the tax consequences of your gains.

Often, wealth managers can devise accelerated gifting strategies to reduce your taxable gains when you sell investments. Some charitable vehicles can produce future income for you and your family while supporting causes you care about and reducing your taxable income.

As you gain wealth, your estate planning needs become more complex. If your wealth grows large enough to become subject to gift and estate taxes, you may need the guidance of a wealth planner to establish trusts that can limit the taxability of your assets.

The financial experts at WRP provide complete wealth management, encompassing financial planning, investment advice, and tax planning and preparation. With specialized expertise in the IPO process, we’re here to help you navigate the complexities of taxes, investment, and planning to create future you desire.

The road to IPO is a long and complex one. A financial professional who understands the IPO process and the tax implications involved is an invaluable asset as you set out to navigate it. For more information about post-IPO lockup periods or to get started with wealth management, reach out to the experts at WRP.