Back in the late 1990s, when Silicon Valley was bubbling with high-tech startups like Google and Netflix, Michael Spector was a young CPA who watched as fledgling cash-strapped companies paid their workers with stock rather than cash. He realized that a significant segment of the Valley's workforce was likely to run afoul of tax rules related to employee stock options.
Such options are a lot like nitroglycerin. Handled right, they're a great ingredient, providing economic incentives to workers without forcing companies to part with much-needed cash.
But handled carelessly, stock options can create explosive tax problems because the government levies taxes on paper gains. With volatile stocks, those gains can evaporate overnight, leaving only a crushing tax burden behind.
Realizing that he could market his accounting firm's services by helping newly minted tech millionaires avoid complex tax problems, Spector put together a stock option training program that he marketed to investment banking concerns. Impressed, Goldman Sachs began bringing Spector in as part of a wealth management team that hoped to handle executives' assets after stock offerings. The clients would go to Goldman for wealth management and Spector for accounting and tax.
"Eventually, the laws changed in California, and I saw the need for a one-stop shop for these clients," says Spector, now 45. "The clients were managing a lot of relationships, and they were frustrated."
In 1998, Spector started the financial planning firm that eventually became known as Vista Wealth Management. The firm, where Spector is CEO, now has 370 clients and $1.1 billion in AUM. Including Spector and three other partners, Vista employs nine advisors, three of whom are CPAs. The firm has offices in Palo Alto and San Francisco, as well as satellite offices in San Jose, Santa Rosa and Walnut Creek.
YOUNG & RICH
The firm's specialty remains working with tech executives, many of whom are young and newly wealthy. Aside from avoiding stock option blow-ups, tech millionaires have some unique challenges when it comes to planning, Spector says. For one thing, some of the multimillionaires that Spector works with are still in their 30s. Many are unmarried. Without children or obvious heirs, they may stare blankly when asked about estate planning.
Few have any experience working with advisors, and many don't even know the right questions to ask, Spector says.
"They come in asking questions that they probably heard on CNBC: 'What's your performance?' 'Do you beat your index?' 'Who do you use as a custodian?' " Spector says. "We have to stop them to ask: What does that have to do with your definition of success?"
While Vista's older clients have been through a downturn or two, the younger millionaires have a hard time focusing on the future, adds a partner, James Knight. "They aren't looking 10 or 20 years down the road, they're looking at today," he says. "What house can I buy? What car can I buy? It's a big educational process with them."
Vista also must educate its clients on the dangers of stock options - not just because of the tax issues, but because of market issues that can decimate the wealth of a tech millionaire. Having lived through technology boom and bust cycles, Spector wants his clients to understand the risks of holding the bulk of their wealth in concentrated positions of one stock - particularly when their jobs also rely on that same company.
If a company were to stumble, a client's employment and wealth could both be put at risk. That makes it imperative that these executives regularly divest themselves of some of their company shares, he says.
Spector encourages his clients to set up Rule 10b5-1 plans, which automatically sell a set number of shares every month or quarter, depending on the plan. (These plans are imaginatively named after the SEC code section that allows insiders to sell stock regularly, without running afoul of insider trading rules.) The proceeds from those sales are invested in safe, liquid and, ideally, inflation-protected securities until the clients accumulate enough "bedrock capital" to keep them in the style to which they have become accustomed - for life.
It may sound like an exceptionally conservative strategy for young investors, but this group faces substantial risk simply by working in a wildly volatile industry, Spector explains. Once he reduces concentrated stock risk in clients' portfolios, the rest of an investment plan is relatively easy.
The firm doesn't invest in individual stocks. Instead, it turns to low-cost mutual funds and ETFs that attempt to meet, rather than beat, the market.
"We are asset allocators with a very long perspective," he says. "We are looking for the best, lowest-cost, lowest tax-sensitivity products and the best global diversification. That usually leads us to Vanguard, Dimensional and a few Fidelity funds."
While the firm draws its income from investment management fees, that's not where Vista directs its focus or what draws clients, according to Spector. Client portfolios are focused only on delivering a return that's consistent with the broader market, he says: "The expectations are very clear."
BROAD CLIENT SERVICE
What brings Vista loyal customers is that the planning firm takes care of a client's entire financial life - from tax and employee benefit planning to insurance and investments. Vista even sometimes plays matchmaker between out-of-work engineers and the companies looking to hire them, and provides clients with career advice.
The career help is not a service that Vista charges for - it's just an offshoot from working with so many clients in the same industry and understanding their needs, Spector says. "We're going to be there to help them out in every situation that we can," he says.
In fact, Vista is so confident its package of services will win clients that it does the bulk of the planning work before it's even hired. Spector says prospective clients sit down with Vista planners who talk to them about their goals, budgets and dreams. The planning firm then gathers tax returns, employee benefit information, a listing of their assets and liabilities, and other relevant information.
With that, a Vista planner will create a comprehensive plan that is then put through "plan defense" - a program where all of the firm's other advisors review and comment on the document.
It's only after a plan passes this test that it's presented to the prospective client. By then, Spector estimates his firm has had several meetings with a client and spent a good 15 hours putting the plan together.
"We don't sign them up as clients until we do all of these things," he says. "By then, they've spent five or six hours with us. They've seen how we work. We have built a relationship and they have deliverables. Our sign-up percentage is in the 90% range."
Kathy Kristof, a Financial Planning contributing writer in Los Angeles, contributes to Kiplinger's and CBS MoneyWatch.
Vista Wealth Management Palo Alto and San Francisco, Calif.
Credentials: CPA, Personal Financial Specialist, Series 65
Experience: Co-founder, Vista Wealth Management; CPA at Spector & Associates; founder of Spector Financial Services
AUM: $1.1 billion
How I see it: "We don't want to be a trusted advisor, we want to be the trusted advisor."