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Are You Getting the Most Out of Your 10b5-1 Plan?

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by  Keith McKenzie

Ever since they were adopted by the SEC in 2000, Rule 10b5-1 plans have offered executives some shelter against charges of insider trading. But they’re more than just a safeguard against unfounded accusations. 10b5-1 plans offer a unique way to strategize the sale of your company stock over the course of twelve months or longer with clarity of foresight, eliminating reactionary decisions and avoiding psychological barriers. The problem is that for all their advantages, many investors aren’t getting the most out of their 10b5-1 Plans. To understand why, it helps to take a quick look at who should have a plan and why.

Who Should Have a 10b5-1 Plan and Why

Anyone with significant stock in the company they work for is a potential candidate for the benefits of a 10b5-1 plan. This includes corporate executives, of course, but even members of a company’s legal or sales team can stand to gain from the plan. If you have stock to sell and you’re worried that you might at some point overhear material, nonpublic information about your company, it’s worth considering the advantages of a 10b5-1 plan. The fact is most people who need a 10b5-1 Plan know that they need one. What they might not fully understand, however, are all of the reasons why.

Rule 10b5-1 plans offer a way to take a disciplined approach to a personal financial plan by forcing you to commit to a sales strategy that serves as an “auto-pilot” towards a goal. The risks a 10b-51 Plan helps you avoid are twofold. First and foremost, there’s the risk of being penalized for trading stock when in possession of material, nonpublic information. Secondly, though, there is the risk of not being able to trade your stock when it’s in your best interest to. Without a plan, an investor who has more company stock than he or she needs might set a price target or a time target for when to sell. Often it’s as simple as “I’ll know it when I feel it.” The problem is these targets never tend to arrive.

More often than not, the investor in this situation doesn’t take enough chips off the table early enough or fast enough, and it’s only an unwelcome wakeup call that leads to action being taken. What’s worse, when such a wakeup call does arrive, they might be locked out of transacting on the stock—either because they’ve since come into possession of material information, the stock is in a blackout period, or some other restriction. 10b5-1 Plans take the guesswork out of selling, giving you the confidence that your stock will be sold with a systematic and thoughtful approach.

It’s important to keep in mind that not everyone needs a 10b5-1 Plan. As a strategy, it might be overkill for an investor who really doesn’t need the shelter from insider trading. In such a situation, implementing a strategic selling plan is often the more sensible route to take.

How to Get the Most Out of Your 10b5-1 Plan

Whether you need a 10b5-1 Plan or simply a thoughtful selling plan, the key to getting the most out of your strategy is applying measured and thorough forethought. Too often investors put a lot of thought into the decision to set up a selling plan but not enough thought into plan itself. Among the litany of questions to consider when setting up your plan include:

  • How much stock should be in the plan?
  • What type of options should be included?
  • What is the best order of sales on a lot-level basis?
  • What day of the month should the stocks be sold?
  • Are there any rules or factors that should be considered as the plan progresses?
  • How are the trades being executed?
  • What are the costs of execution?
  • How should the sales proceeds be managed or invested?

The answers to these questions determine whether or not you’re getting the most out of your plan. Only by working with an expert financial advisor who specializes in thoughtful strategic planning can you be sure that your plan is optimized to minimize your tax obligation, save you time, and prevent the regret that comes with missing optimal selling periods or selling at the wrong time.

Unfortunately, the reality is that investors make common mistakes with regards to their selling plans all the time. They sell shares in the wrong order, they sell the wrong lot, or they sell too much or too little because it feels right at the time. They pursue a strategy based on a target goal that keeps moving and that has nothing to do with their own personal financial goals. Working with a financial advisor to structure a plan that is tied directly to the financial goals of you and your family enables you to make rational decisions about the sale of your stock that aren’t subject to market fluctuations or psychological anchoring.

10b5-1 red flags delphi private advisors

The Pitfalls of Suboptimal Advice on Your 10b5-1 Plan

As with most areas of wealth management, executives are all too often the recipients of suboptimal advice when it comes to Rule 10b5-1 plans. Commonly, brokers will tell you that it’s fine to get the plan going and that you can make changes to it at any time. While this is legally allowed, that doesn’t mean it’s a good course of action to take. Plans that have multiple modifications, short durations, terminations, etc. can result in tough questions to answer should the SEC ever come knocking. The idea behind a 10b5-1 plan is that your strategic sale of stock is done without material, nonpublic information about your company. If you’re continually adjusting the plan, it can be difficult to prove you didn’t make those adjustments for a reason. For a list of red flags to avoid when it comes to 10b5-1 plans, see this article’s sidebar.

The Takeaway

10b5-1 plans are a useful tool for the wealth management of corporate executives. They give you the power to liquidate your company stock in a highly strategic fashion, as well as help create a claim to safe harbor that can alleviate anxieties around risk, tax implications, and achieving your personal financial goals. But like any wealth management tool, 10b5-1 plans are only as good as the thoughtfulness behind them. Hastily setting up a plan and tinkering with it on the fly is not a recipe for success. Rather, it’s in the best interest of corporate executives to find a wealth management team that will seamlessly coordinate with their tax team in thoughtfully engineering a personalized plan designed to achieve purposeful financial objectives.

Speak with an advisor

There’s no better time than now to protect the wealth you’ve built. Contact us today to speak with an advisor.

SCHEDULE NOW