Why Every Corporate Employee Should Have an Investment Policy Statement

December 08, 2023

Every year, millions of Americans receive equity shares, or rights to future share purchases, from their employers. Often coming in the form of equity compensation, these shareholdings can be a fantastic way for employers to reward employees while the employee gains assets with wonderful wealth growing capability. As a result of these compensation practices, executives in particular can find themselves in the enviable position of amassing great wealth in employer stock.

As an individual or family with an increasing position in one stock, it becomes increasingly important to evaluate the size, volatility and related risks in continuing to hold these positions. The general rule of thumb is that when a single stock represents more than 10% of your net worth it is an increased risk to your wealth and should be managed as such. As the concentration in employer stock grows, it is crucial to also recognize your exposure to this stock in your personal investment portfolio. If you already have enough, or even too much, employer stock through work then you should not be adding more in your personal portfolios.

We find that many executives have traditional stockbroker relationships that can fall short in the ability to efficiently mitigate this risk. Often, they are relying on a broker to not make the mistake of purchasing additional shares in their account. If you are considered to be an Insider or subject to Rule 144 through your employer, a mistake of purchasing or selling your restricted stock without prior approval could cost you your job, your career or even worse. These are all risks that no one can afford.

These are all reasons why we recommend our clients utilize an Investment Policy Statement (IPS) for all portfolio investments. An IPS is a guideline rulebook as to how your portfolio will be managed, the risks you are comfortable taking and the types of assets you are willing to utilize. As such, we have the ability to restrict, by contract, trading in specific stocks. We recommend clients use an IPS to eliminate the risk of trading in employer stock to prevent increasing exposure to a concentrated position or insider trading concerns.

If you are a shareholder in your employing firm, I highly recommend you consider implementing an Investment Policy Statement of your own. If you would like to learn more about how an Investment Policy Statement is created and implemented, please schedule a complimentary15-minute intro call with a member of our team.

Until next time...

Tim Golas,
Spurstone Partner