The Employer Shares and the Mortgage
Mei, 45, earns $160,000, has $400,000 of shares in her NZX-listed employer (vested from a share scheme), $150,000 in a growth KiwiSaver, $80,000 cash and a $300,000 mortgage at 6.8%. Her employer shares are 40% of her net worth and 55% of her liquid investments. She also receives 10% of her pay in more shares each year. She plans to retire at 60. The shares have fallen 25% in six months, and she says she will ‘hold until they recover’. She has no other debt, no dependants, and a 6-month emergency fund. She wants to know whether to sell employer shares to repay the mortgage or keep them for growth. Her KiwiSaver is 80% growth and 20% cash. She is not subject to a trading blackout. She has asked for a ‘rough plan’ and does not want a full financial plan.
1. Identify the main risks in Mei’s position and critique her ‘hold until recover’ approach.
Read the worked answer
Mei has a concentrated exposure to her employer. Her salary, future share grants and $400,000 of shares all depend on the same company. That is double exposure: if the company struggles, her human capital and financial capital fall together. The shares are 40% of net worth and 55% of liquid investments, so a further 25% fall would wipe out about $100,000. Her overall growth exposure is also high because the KiwiSaver is 80% growth, so her liquid portfolio is dominated by equities.
‘Hold until recover’ is anchoring and loss aversion, not a plan. It assumes the shares will return to their previous price and ignores the opportunity cost of not diversifying. The mortgage rate of 6.8% is a guaranteed after-tax return on repayment. At a 33% marginal tax rate, earning 6.8% after tax from an investment would require about 10.15% before tax (6.8 ÷ 0.67). Repaying the mortgage is therefore attractive on a risk-adjusted basis, though it reduces liquidity.
The main risks are concentration, correlation with salary, high equity exposure, behavioural bias and liquidity. The 25% fall is a symptom, not the whole problem.
2. Recommend a practical plan for the employer shares, mortgage and KiwiSaver.
Read the worked answer
A reasonable plan starts with the emergency fund and cash flow. Mei has a six-month emergency fund, so she can use part of the $80,000 cash for near-term needs and avoid selling shares in a panic. She should set a target maximum for employer shares, such as 10% of net worth, and sell down over 12–24 months in scheduled tranches rather than trying to time the market. Because she is not in a blackout and there is no NZ capital gains tax on the shares, the main cost is brokerage and the behavioural discomfort of selling at a lower price.
Use the sale proceeds first to reduce the mortgage, which gives a guaranteed 6.8% after-tax return, and then to build a diversified portfolio. She can invest through her KiwiSaver or a managed fund, depending on liquidity needs. Her KiwiSaver at 80% growth is aggressive for a 45-year-old with a large employer-share exposure; a lower growth allocation or a diversified fund would reduce total portfolio risk. She should also consider directing future share grants into diversification rather than accumulating more employer stock.
The plan should be presented as a range, not a promise: for example, reduce employer shares to below 10% of net worth, repay part of the mortgage, and hold a diversified growth allocation appropriate to a 15-year horizon.
3. What advice-process and monitoring steps should accompany the plan?
Read the worked answer
Even though Mei asked for a ‘rough plan’, the adviser should provide a written statement of advice that records her objectives, financial situation, the concentration analysis, the mortgage comparison, the alternatives considered and the risks of selling or holding. The adviser should explain that the plan is not a full financial plan and identify what has not been covered, such as insurance, estate planning and tax. Mei should confirm the level of advice she wants.
The file should record her decision, including any instruction to retain some employer shares. Monitoring should include a review trigger if the share price moves materially, if her employment changes, if the mortgage rate changes, or if her retirement date shifts. An annual review should check the shareholding percentage, mortgage balance, KiwiSaver allocation and emergency fund. The adviser should also watch for a new blackout or insider-trading restriction before any sale. The key control is to prevent the concentration from rebuilding through future share grants.