How wealth advisors temper the portfolio risks of newbie ESOP millionaires

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Alok Saigal has spent the last seven years advising his firm’s private wealth and high networth clients on how to invest their money. He is the President and Head–Private Wealth at Edelweiss Wealth. Saigal has been a finance professional for close to 20 years now. But when young 20-something clients walk into his office flaunting their employees’ stock options (ESOPs), Saigal says his usual art of advising clients is of little use.

The start-up millionaire is, typically, young. His approach is different, he says. “You’ve got to talk to them in their language,” says Saigal.

You cannot tell them to avoid cryptocurrencies with a bargepole, says Gaurav Karnik, a mutual fund distributor and co-founder of Fortunexus, a firm that advises start-up employees. “They have a mind of their own. If they want to invest in cryptocurrencies, you’ve got to tell them about the risks in a way that would make them invest just a minimal amount, because a flat ‘no’ is something they’d seldom take,” says Karnik.

Financial advisors agree unanimously that most of them are financial illiterate, though they understand technology very well. How do such wealth advisors walk the tightrope?

Engaging with companies at early stages

Most of the wealth advisors say that they usually start interacting with companies at an early stage. Saigal says that the relationship, typically, begins with the founders when they get their initial rounds of funding. The money that flows in through private equity and venture capitalists comes with boundaries and restrictions on how to use it. “We guide the company treasuries on how to invest this money,” he says.

As the company grows, raises more money and, in the process, gives ESOPs to employees, wealth advisors get in touch with the human resources department. Varun Girilal, Chief Wealth Officer, Scripbox, says that his firm conducts specialised ESOP awareness camps at many companies across India.

Shaji Kumar Devakar, Executive Director, IIFL Wealth says that the firm starts counselling young employees around 6-8 months before the company goes for its IPO to prepare them of the windfall gain they are likely to make.

Understanding the ‘risk’ psyche

Startup millionaires love to take risks. Karnik says that some in the startup crowd made as much money in 2-3 years’ time frame that many others would take 20 to 25 years for. “That can sometimes blind them and they start to feel that investing in other startups is a way to getting rich faster,” says Karnik.

Girilal says that many of them get lured by high-risk ventures, positioned as high-growth investments. The ‘Fear-Of-Missing-Out’ syndrome nudges them to take undue risk.

Yet, Devakar says that wealth advisors must be cognizant of their high risk-taking ability. The key is to channelize the risk-taking ability in the right direction and yet allow the young crowd some room “to do what they want with their money.” Traditional goals don’t work. Don’t’ mention ‘retirement savings’ to them. Yet, Karnik says, many of them don’t like to work till they are 60. ‘Financial freedom’ is an idea that clicks with them, so Karnik advises them to become debt-free and aggressively pay off their loans once they realise their ESOP bounty.

Being in the technology space, many in the start-up crowd love cryptocurrencies. “They call it their portfolio,” quips Karnik. He advises his start-up clients to keep taking the principal amounts invested in cryptocurrencies off the table, “so that the capital is safe. Beyond that, as far as risk appetite is concerned, to each his own.”

Also read: Millennials and cryptocurrencies: A story of missed profits, hard lessons and losses

ESOPs: Be ruthless

Bengaluru-based financial planner Srivathsala Nandgopal says stock-option holders “don’t register how big the numbers are and what it can do for them. That is because they have probably not handled such a big sum of money earlier.” She works closely with startup ecosystems in India. “When it comes to financial advice, much counselling is needed for the startup crowd,” she says. The challenge, she adds, is when an employee usually gets Rs 5 crore or more by way of ESOPs.

Cultural biases play a role, she has observed. While technology sector workers from the South are usually conservative and their lifestyles don’t change much, people from the North, she says, typically start to use the money for discretionary goals. Srivathsala says advisors play a significant role in how the young crowd deals with its ESOPs.

Her advice: sell some shares. She says many employees, especially entrepreneurs and founders, continue to hold shares because they feel attached to their startups and hope that their value will appreciate significantly over time. Still, they should recognize that it is a precarious asset class. “Be objective and secure your primary goals – at least partially – with less risker asset classes, she says.

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