This year, RegentAtlantic will run a series of blogs that address strategies for managing concentrated stock positions and other financial issues corporate executives tend to face. This first blog focuses on 10b5-1 plans, which are employer-provided plans that provide a systematic way to buy or sell your employer’s company stock.
Before you get lost in Securities and Exchange Commission (SEC) jargon and the details of these plans, though, let’s look at the big picture. For a moment, think about your 10b5-1 plan as a delicious slow-cooker dinner that’s waiting for you at home after a long and stressful day.
The “set it and forget it” approach
These cold winter days have me frequently breaking out the slow cooker for dinner. I usually have all the necessary ingredients on hand to make a tasty recipe. After I prepare the meal in the morning, I set it and forget it until I come home.
The great thing about this cooking process is that I get a wonderful sense of peace, knowing I’ve handled dinner before I even leave the house in the morning. When I head out to start my day, I don’t think about dinner again until I walk in the door at home to the aroma of a hot meal. Even better, if I plan my cooking well, I know I’ll have leftovers to enjoy another time.
First: What is 10b5-1 plan anyway?
By way of quick background: 10b5-1 refers to a rule in the SEC code that simply allows active employees to buy or sell company stock without running afoul of any restricted trading windows or insider trading laws.
Working with his/her legal and compliance departments, an employee can predetermine dates and prices for selling (or purchasing) company stock. One key rule is that when you structure the plan, you can’t have access to any material non-public information about your company.
How is a 10b5-1 plan similar to a slow-cooker dinner?
The appeal of a 10b5-1 plan is actually quite similar to the appeal of a slow-cooker meal. Here’s how:
- You already have the ingredients on hand—your company stock, stock options and restricted stock. What’s great about a 10b5-1 plan is that you can add all, some or none of the different types of company stock (“ingredients”) you own. Your RegentAtlantic Wealth Advisor can help you determine which choices should go in your plan.
- Like a slow-cooker meal, there is some upfront work involved in setting up a 10b5-1 plan. The preparation includes determining the length of the plan, as well as the dates and prices that would trigger you to sell your stock. Also, the plan needs to be approved by your company’s legal and compliance departments.However, once your plan is in place, you no longer have to wait for an open window to do your trading, nor do you have to constantly think about what trades you should execute. Again, once you decide to create a plan, your RegentAtlantic adviser does the legwork of identifying dates and prices for you.
- You can eliminate the stress of trying to plan for “dinner” (the stock) and instead focus on other priorities, such as work and your family. Depending on your company’s rule, your plan will be active for six months to two years. Your team at RegentAtlantic will monitor your plan and update you. Once one plan’s term ends, you can easily put another plan in place.
- By thoughtfully planning beforehand, you’re more likely to enjoy a better-tasting meal (less financial risk). If you’re methodical and reasonable about the prices you set, you’re more likely to generate a higher rate of return. You will no longer try to just hold the stock and wait for the highest possible price.
- If you’ve planned carefully, you may have “leftovers.” In other words, proceeds from your company stock can be strategically directed to meet other financial goals. Your RegentAtlantic team will help you plan how to use your proceeds. Some options include: Fund a 529 plan? Invest in a more diversified portfolio? Pay off debt? Make a large donation to your favorite charity? Buy a new car or a vacation home? The choice is yours.
- You eliminate guesswork (when to sell your stock) and avoid making rushed or emotional decisions because your time is tight. In the slow-cooker analogy, this means no more thinking: “I just have to get something on the table!” After you determine your ideal stock price targets, you can enjoy selling your stock methodically. This point is important, because it’s difficult to modify your 10b5-1 plan once it’s in place. It’s sort of like trying to remove one seasoning from your slow cooker once it starts bubbling away.
- Cleanup is easy. A slow cooker meal consists of one pot and a few dishes. Similarly, once you set a 10b5-1 plan in place, it’s easy to renew the plan after the first one expires.
Of course, there are intricacies to 10b5-1 plans that differ for each company. A couple of the key differences include how long you have to wait until the plan is live and your plan’s allowable lifespan. However, when your RegentAtlantic Wealth Advisor helps with your plan, he or she can talk to your legal and compliance teams to navigate these variables. We can also advise you about any tax issues you may face when you sell stock and exercise options.
Can you manage your own company stock trades?
We’ve seen clients who didn’t have 10b5-1 plans in place and want to “DIY” their trades. These investors were sure they could figure out when to sell their stock. However, our experience has been that investors who handle their own stock choices often wait too long before selling and miss potential opportunities. Just as you may affect your slow-cooker meal’s outcome if you constantly lift the cooker’s lid to check on your recipe, not having a solid 10b5-1 plan can impact your stock success.
Here are a couple of good examples. Think about employees who worked for Quest Diagnostics or Celgene in 2017, or Novartis a few years back. Let’s say you worked for Celgene and you established a 10b5-1 plan for 2017. In the fall of 2017, Celgene stock dropped from its high of $147 per share down to $100 in a matter of weeks. Since then, it has fluctuated between $100 and $110 per share.
If you had owned Celgene stock when the price hit $147, would you have known to sell? Or would you have waited to eke out a little more return? What we know for sure: We can’t time the market and most people who try to do so get the call wrong.
On the other hand, if a Celgene employee had sold some shares at $100, some at $110, some at $120, and a few at $130, they would have been much better off than if they held on at $147 and are now holding shares worth $102. That’s what a systematic 10b5-1 could have accomplished for them.
Quest Diagnostics offers another good example. Over the last five years, the company experienced a steady increase in market price. However, over the last year, the price has been quite volatile. An employee-owner of Quest stock would have been smart to use a plan that took a bit of stock off the table each month or each quarter. The stock price’s volatility would have been much cause less for concern.
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.
This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.
RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.