Questions Techies Should Ask Their Tax and Financial Advisors
If you work in tech, you know how to DIY a lot of things and problem solve. You’ve probably perused the r/PersonalFinance subreddit and know the basics of how you should be investing and managing the equity you receive.
At EquityFTW, we want to be a resource so that you can keep doing your DIY thing for as long as possible but are here to provide advice when you need it.
The purpose of this article is to provide you with questions you can ask your CPA, CFP, CFA, or other professional advisor to make sure they know their stuff. There are good advisors and bad advisors, and this list will help you sift out the bad ones so you can get the help you need.
Four Sets of Questions
Since our readers have varying levels of complexity, we’ll provide questions to ask based on how complex your situation is.
At the end of the day, if you feel like you need help with an area of investments, tax, or equity compensation, you should start interviewing an advisor.
Questions everyone should ask their advisors
Questions to ask if you have Restricted Stock Units (RSUs) or an Employer Stock Purchase Plan (ESPP)
Questions to ask if you have also have Incentiv Stock Options (ISOs) or Non-qualified Stock Options (NSOs)
Questions to ask if you are considering an 83(b) election, need a 10b5-1 plan, or might potentially hold QSBS-eligible stock.
Each set of questions builds on top of each other so if, for example, you think you’re in set #4, you’ll want to read questions from the previous three sets as you may want to use some of the previous questions.
A big note here, do not use all of these questions at once. There are a lot of questions and you don’t want to be obnoxious.
In fact, some questions may feel like “gotcha” questions to the advisor if you don’t ask in the right way. Make sure that when you’re asking questions, you’re showing your genuine interest in whatever the question refers to.
Set #1 - Questions everyone should ask their advisors
What made you want to get into [your profession]?
Knowing this isn’t necessarily vital to you deciding to work with someone or not, but it’ll give you a sense of the passion the advisor feels about the work they do.
What credentials have you obtained as part of your role at [name of company]?
Whoever you work for should at least have some credential. It could be a CPA, EA, CFP, CFA, CPWA, ECA, CEP, the list goes on and on. That said, there are a lot of financial advisors that will have some “Series” licenses. Like the “Series 7” or “Series 66.” These licenses are not that hard to get and don’t show that the advisor has sought additional knowledge.
[Optional Follow-up] Are you pursuing additional designations right now?
We like asking this because your advisor should be doing his/her part to continue learning and improving. If you’re going to be paying someone for professional help, you should expect they’re staying on top of the material their supposed to be an expert in.
How many other tech professionals do you work with? Or how many clients do you currently serve?
This is important to know because financial advisors can typically only serve 80-120 clients effectively. For accountants it can vary on how large their team is and what type of clients they serve. The goal here is to ensure that your advisor will have time for you.
Are you a fiduciary?
This is a fancy way of asking if the advisor is required to do what’s best for you. In the financial advice world, being a fiduciary isn’t the norm. The majority of advisors follow what’s called a “suitability standard.” This gives them the leeway to put their own interests before some clients, if the recommendation is still a suitable recommendation.
How are you compensated for the work you’ll be doing for me now and in the future if we work together on an ongoing relationship?
You should know exactly how your advisors are being compensated and if they aren’t forthright with how they express their fees, it’s kind of a red flag. Nobody likes talking about fees so maybe cut them some slack, but at the same time, they should be somewhat quick to disclose.
What commissions, kickbacks, or referral fees do you receive as part of doing business with clients?
This question is similar to the previous question, it’s just a little more direct. It’s very important question because you want to understand where there might be potential conflicts of interest. A common example is with life insurance. If you’re working with someone who sells life insurance, they have a large incentive to sell you a larger policy because they receive a 60-80% cut of whatever your 1st year premiums add up to.
What potential conflicts of interest do you foresee us running into as we work together?
Conflicts of interest are sometimes unavoidable, but the advisors that bring them up and get them out in the open are typically the ones you can trust.
Set #2 - Questions to ask if you have Restricted Stock Units (RSUs) or an Employer Stock Purchase Plan (ESPP)
What is your comfort level in handling Restricted Stock Units (RSUs)?
This is kind of a set up question for further questions about RSUs. If the advisor is honest and answers no, it may not be a deal breaker, but your advisor should probably know enough about RSUs to be comfortable to advise on them. And if they aren’t, they should have someone else on the team that’s capable of assisting.
Can you explain to me when I owe taxes on RSUs?
We’ve published an article detailing when you owe taxes on RSUs. The simple answer is, at vest and potentially when you sell. If you work at a company that hasn’t gone public yet, then this answer gets a little bit more complicated as you may have what are called double-trigger RSUs.
Do you think I should be contributing to my company’s ESPP?
After you’ve provided details of the ESPP, this is a good question to ask. Most ESPPs, especially in the tech world, are really beneficial and you should participate. Even if you don’t hold the shares you purchase for long-term capital gains treatment, you can sell the shares shortly after purchase to lock in a discount and basically get free money.
Set #3 - Questions to ask if you have also have Incentiv Stock Options (ISOs) or Non-qualified Stock Options (NSOs)
What taxes do I owe with RSUs?
This should be an easy one for an advisor. The answer is you’ll be subject to ordinary income tax rates at vest (unless non-public), and potentially capital gains when you sell.
How do taxes work with NSOs?
The advisor should know that at exercise, you’ll owe ordinary income taxes on the “spread,” which is the difference between the exercise price and the current market value on the exercise date. If the company is private, the current market price will most likely be whatever the latest 409a valuation is. We published an article detailing the answer to this one and we recently published a terms list that helps acquaint you with the basics of nonqualified stock options (NSOs).
What are the rules with my Incentive Stock Options (ISOs)?/ What is a qualified disposition?
The quick answer here is that you must sell your incentive stock options (ISOs) at least two years from grant and one year from exercise if you want a qualifying disposition.
Will I owe taxes when I exercise my ISOs?
This answer can depend on a lot of things and requires the use of some tax software to get it exactly right. If you have unexercised ISOs that have increased in value significantly or have a lot of ISOs, it’s likely you’ll trigger Alternative Minimum Tax (AMT) by exercising a big portion of your unexercised ISOs.
How often do you complete AMT crossover calculations for clients? Is this something you’re able to do?
This is kind of a follow-up to the previous question, but can be a standalone question.
What happens to my vested ISOs if I quit working?
This is a fun one that a lot of advisors probably don’t realize. After quitting a job, you lose unvested ISOs, but get to keep vested ISOs. However, after quitting, you typically only have 90 days to exercise your ISOs before they turn into NSOs.
Set #4 - Questions to ask if you are considering an 83(b) election, need a 10b5-1 plan, or might potentially hold QSBS-eligible stock.
Would you be able to help me draft a 10b5-1 plan?
This one is more just for you to know if you’re able to get some extra help. If an advisor is learning a lot about you and your wishes for your finances, it makes a lot of sense for them to be in the loop with what’s going on with your 10b5-1 plan.
What transactions do you typically break out on a 10b5-1 plan?
Hopefully they have some experience here and can give you some basic guidance on dos and don'ts. Hopefully they mention that a common strategy is to list RSUs to sell as they vest. We’ve provided a very basic 10b5-1 walkthrough in this article.
Do you have experience with QSBS stock or have a connection that can assist us with QSBS stock?
If you received founder shares of a company or were an early employee at a company, there’s a possibility that your equity is QSBS-eligible. If you are eligible, it means that you can potentially pay 0% federal income tax on up to $10m worth of gains. Typically the work that’s done here is with a CPA, so if the advisor doesn’t have the experience directly, he/she should have someone.
Am I allowed to do an 83(b) election on RSUs?
This is kind of a sneaky one. A lot of people think you can do 83(b) elections on RSUs, but you cannot. If they confirm that you cannot, they’re probably pretty familiar with RSUs and equity compensation in general.
When can I do an 83(b) election?
An 83(b) allows you to pull forward the taxation of the equity you’re receiving to the date you’re making the 83(b) election. A very common misconception here is that you can only exercise within 30 days of receiving a grant of NSOs or ISOs. This is not true. If your company allows for an early exercise, you must only file the 83(b) election within 30 days of exercising, not from the date of grant.
If you have Restricted Stock (not to be confused with RSUs), you have 30 days from the date of grant/release.
What are the pros and cons of doing an 83(b) election?
This shouldn’t be too difficult for someone who’s dealt with more complex equity compensation questions. The risks of doing an 83(b) election are that (1) you could lose your money from exercising in the case of ISOs/NSOs, (2) if you pay tax as part of the election, the IRS won’t give you a credit if the company goes under. (3) Typically you can only do 83(b) elections with nonpublic companies so there’s a big question mark on when you’ll actually be able to sell the shares you’ve exercised.
Final Words About Choosing an Advisor
Managing your finances yourself is totally possible, however, advisors can provide valuable insights into areas you may not be familiar with (estate, tax, investments, charitable giving, insurance). We offer Advice-Only services for those who want to work with us. This is just a fancy way of saying we charge for the advice we give, but don’t management investments nor do we receive commissions on anything.
The only way to truly get to know someone is by asking them questions and being thorough with those questions. There are a lot of great advisors and there are a lot of crappy ones.
Our recommendation is to work with an advisor who is a CFP professional, that either has a CPA designation or works directly with CPAs, and is transparent about how they charge their clients. You can work with them for a year or two to learn what you can. If you want to keep working with them you can, or if you don’t really like it that much, you can take what you learned and keep doing your DIY thing.
We know advisors throughout the U.S. that know their stuff. We’re happy to share their contact info with you if you’d like so feel free to reach out: team@equityftw.com