How to Advise Clients on Restricted Stock Units

Article written by: Coryanne Hicks, Contributor | Published by: U.S.NEWS

RSUs can make up an important part of a client’s compensation if handled correctly.

RESTRICTED STOCK UNITS, or RSUs, are a form of equity compensation offered to employees of private and public companies. They are becoming increasingly popular and more frequently crossing financial advisors’ desks.

As RSUs increase in popularity, financial advisors are in a position to help clients navigate their RSU compensation plans to ensure they’re getting the most out of their company’s offerings.

“Advisors need to help clients map out a personalized plan of action ahead of time to ensure clients know what is going to happen and to determine what they will do with the units as they vest and become shares,” says Brad Cast, wealth manager and partner at Merit Financial. But remember that every investor is unique. You may work with 20 employees from the same company, but each situation may require a different approach, he says.

Here is what advisors should know about helping clients with RSU compensation.

What Are Restricted Stock Units?

“Restricted stock units are stock-based compensation used to reward employees after a certain period of time,” says Joseph Safina, founder and CEO of Safina Capital.

When initially given, RSUs are simply a promise by a company to issue shares of the company stock to the recipient at a future date. They have no tangible value until that stock is issued when the RSU has vested, which typically happens a few years after the RSU is given or when certain performance metrics are met.

“An RSU grant will specify a number of shares to be awarded to an employee over a vesting period,” says Ryan Schwartz, vice president at EP Wealth Advisors. “The value realized by the employee will depend on the value of the underlying stock when the RSUs vest and are then taxed on the delivery date, usually the same as the vest date.”

RSUs can be confused with stock options, which give employees the right to purchase company shares at a predetermined price. With an RSU, the shares are given to the employee upon vesting. The employee doesn’t need to purchase the shares.

Once shares are vested and received by the employee, the worker has full ownership rights over the shares, which can be treated like any other publicly traded stock, Safina says, although there might be restrictions in terms of selling or trading them during a predetermined blackout period.[ 

How Do Taxes Work With RSUs?

RSUs are taxed at ordinary income rates when the shares are received by the employee.

“One vital thing that advisors should make their clients aware of is that upon vesting, these shares are considered income, so that should be taken into account when analyzing the benefit,” says Daniel Milan, managing partner of Cornerstone Financial Services.

The company typically withholds a certain number of shares at vesting and converts them to cash to pay the taxes, similar to tax withholdings from 401(k) withdrawals, he says, but this could still bump an employee to a higher tax bracket. Advisors should make sure clients confirm upfront how the company will handle withholdings.

“In most cases, federal taxes are withheld to a point, as are Social Security and Medicare,” but additional federal taxes may be due for clients in high income tax brackets, Cast says. State tax is often not withheld.

Private companies and small public companies may not have “ready sources of liquidity for either withholding or disposition of the units,” says Nadine Lee, president of Colony Family Office and managing director of The Colony Group Metro New York Offices. “An advisor needs to ask the question rather than just assuming that everything is in place.”

“The values of the restricted stock units are based on the value at the time of vesting and are provided at a cost basis predetermined by an adopted formula by the employer,” Milan says. “Often, the formula is based on the average of the last 30 days of trading prices.”

Unvested RSUs are typically forfeited when an employee leaves the company, says Dan Fasciano, head of portfolio management at BNY Mellon Wealth Management.

How Financial Advisors Can Advise Clients on Restricted Stock Units

“Financial advisors can really help clients make important decisions regarding shares of restricted stock,” Cast says. “The stock needs to be modeled or included in part of a client’s holistic financial plan.” Cast advises working with your client’s tax professional to ensure the stock is included as part of the client’s compensation expectations, and resulting taxes are taken into account.

Once the shares are received, your client will have some decisions to make regarding whether to hold on to the shares or sell them. “The tax law generally treats the vesting of the units as a paycheck and so should the client,” Lee says. “The shares will have been fully taxed, so immediately selling the shares received will not result in additional tax consequences.”

Your client can thus minimize short-term capital gains by selling the shares quickly upon vesting, Cast says.

Lee advises having clients clear any sale of their RSUs through company counsel. “Large public companies generally have well-vetted programs to manage the vesting, taxation and disposition of the shares,” she says. “If a client is considered a ‘company insider’ for regulatory or corporate policy purposes, they will be precluded from selling shares until there is a window in which they are not in possession of material nonpublic information.”

Choosing to retain the shares should also be a conscious decision, she says. “You are, in effect, taking your paycheck and buying the stock at the then-market price.”

Schwartz recommends asking clients who want to hold their vested shares if they would use a cash bonus to buy their company stock. “Holding a recently vested RSU is essentially the same thing,” he says.

If your client does wish to hold the shares, Cast says to be careful not to violate the prudent investor rule by having more than 10% to 15% of liquid net worth in a single publicly traded stock.

How Financial Advisors Can Address Risk Associated With Restricted Stock Units

Diversification risk is an important consideration for clients with RSUs. “Active wealth considerations call for the advisor to factor in both vested and unvested stock exposure as it relates to single-name concentrations and asset allocation risk in the client’s portfolio,” Fasciano says. This is particularly important when the concentrated position is in the company the client relies on for income as well.

RSUs can present measurable market and sector exposure to the client, he says, but “employees often have a positive predisposition toward the long-term prospects of the firm that employs them.” An advisor’s role is to provide an objective and prudent counterbalance to this bias.

“When using financial planning software, pay attention to modeling concentrated stock risk,” Schwartz says. “Some software will not automatically differentiate the risk profile of an individual stock versus an asset class, and that can lead to miscalculation of risk in a financial plan.”

The bottom line is to be proactive and prepare clients before the RSU vesting occurs, regardless of whether or not they will take action once the RSUs vest, Cast says.


Coryanne Hicks is an investing and personal finance journalist specializing in women and millennial investors. She has written for U.S. News & World Report for several years, as both a contributor and staff writer.