Stock options became a popular vehicle to technology company employees in the 1990s. Today they're seeing another surge in popularity, and are used to attract, retain and motivate executives and rank-and-file employees in all types of businesses. The National Center for Employee Ownership (NCEO) estimates that as of 2009, among companies that have stock, about one-third of the workforce participates in some kind of employee stock option plan.

So now is an ideal time for advisors to incorporate comprehensive stock option planning into their services-especially since many employees who have access to employer stock option plans have little to no understanding of how stock options work.

According to a 2002 survey by Fidelity Investments, roughly one million U.S. households let options expire from late 1999 through late 2000. Many employees view stock options simply as an employee benefit, rather than as a valuable part of their overall investment strategy. That's where a knowledgeable advisor comes in.

Many advisors base their stock option planning decisions on a few technical factors-taxes, current stock value or timing. While these are important considerations, they may not provide a complete view of the stock option landscape.

By taking a holistic approach to stock option planning, you're more likely to produce a successful outcome for your clients. In fact, if managed prudently, employee stock options can prove to be one of the most valuable investments in a client's portfolio.

TAKING STOCK

One advisor doing exactly that is Paul Pradel, of Pradel Financial Group in Seattle. Roughly a dozen years ago, Pradel was working with a client whose employee stock options were worth almost nothing. As the stock value increased, so did the potential value of the options. Through vesting and additional option grants, the company stock became a much larger piece of the client's net worth. Inspired by his experience with that client, Pradel began developing an expertise in guiding investors with corporate benefits, and today stock option planning is a key element of his practice.

What's Pradel's stock option strategy? In a nutshell, it's "look beyond the obvious and focus on the long term." Pradel takes a six-step approach to crafting a personalized stock option plan for each client. The process is designed to give a complete picture of the client's unique stock option situation.

1. Assess the client's investment knowledge. How sophisticated and knowledgeable is the client in terms of financial planning and investing? Does the client understand how his stock options work? Does he have any emotional attachment to the company? Does he have a particular loyalty to-or a high level of familiarity or comfort with-the stock?

2. Study the company's benefits information. Learn everything there is to know about the company's employee stock options and other benefit plans. How do the options vest and expire? What happens if the employee is terminated or retires-are there different rules for each scenario? Are certain employees subject to any special corporate rules? Does the company's human resources department provide financial education?

3. Delve into the client's stock option details. Thoroughly examine the client's current stock options. Are any grants near expiration? What is the time value of the options? How have prior grants been used or invested? Does the client use the options as a source of income? Will the client have the opportunity to obtain more stock, such as restricted shares, stock awards or employee-sponsored ownership plans (ESOPs)? What is the company's financial status? What is the stock's historical performance?

4. Analyze the client's exposure and diversification. What percentage of the client's overall assets do the stock options represent? Does the client also own company stock in his or her 401(k) or ESOP? Does he have additional exposure, such as restricted shares? Is he overweighted in the stock? How is the overall portfolio allocated?

5. Find out if the client is an insider (Section 16 or other). If so, is he subject to any mandated stock ownership requirements (such as owning a certain number of shares), vesting schedules, insider trading rules or trading windows? Will he continue to have opportunities to obtain more shares in the future?

6. Assess the client's tax situation. Identify the current and potential future tax brackets of the individual or household. Are the options nonqualified or incentive stock options (ISOs)? Does the client work with a CPA who has extensive knowledge of stock options?

PUTTING IT ALL TOGETHER