3rd Quarter Updates and Commentary from IEM
Autumn brings thoughts of preparing for winter as well as making sure that we are planning for the future: our accounts and documents reflect our wishes. This is a good time to review and update, if needed, beneficiary designations and estate plans. Charles writes about SARs, RSUs and Stock Options; Daniel gives us an update on the market, and we start off by looking at IEM’s commitment to community. Enjoy.
IEM in the Community
The people of IEM believe in supporting and participating in our greater community. Each year, we select organizations to be recipients of an IEM donation and volunteer time. This spring we visited elementary schools with Start Reading Now to deliver books to children; the following are two additional organizations we believe in and contributed to in September.

Hold Your Horses
The team at IEM and their families got their giddy-up on in September in celebration and support of Hold Your Horses, a non-profit that provides occupational therapy, physical therapy, and mental health services through work with horses. Their annual “Hay There” event brings together families for games, food, and fun to raise money so that Hold Your Horses can continue its extensive work with children and adults.

As Premier Sponsor of Hay There! IEM upholds its belief and core value of giving back to our community and supporting organizations dedicated to serving the needs of others. To learn more about Hold Your Horses, please follow this link: https://holdyourhorses.org/

Adoption Medicine Clinic
IEM was pleased to be a VIP sponsor at Adoption Medicine Clinic University of Minnesota’s fundraiser in September, giving more children and families access to important medical care and advocacy in preparation for their transition and beyond.

AMC is a vital resource to families with children adopted domestically, internationally, and in foster care. Over a period of thirty years AMC has provided more than 30,000 pre-adoption consultations, medical reviews, travel counseling, and comprehensive post-adoption care for children.

Supporting the important work of AMC-UM is part of IEM’s commitment to our community and to children. If you would like to learn more about AMC, please follow this link: https://adoption.umn.edu/
IEM team members meet AMC gala host, world champion basketball player Trent Tucker.
Q3 Market Commentary
Tallying up 2019’s third quarter returns of major indices may falsely portray a rather mundane few months. To the contrary, however, the market continues to digest two significant economic stories – trade wars and Federal Reserve monetary policy – that have led to periods of volatility. We elaborate on that below, but first to the numbers: the S&P 500 returned approximately +1.7%, the MSCI ACWX (International stocks) returned approximately -1.8%, the Russell 2000 (Small Cap US stocks) returned approximately -2.4%, and the Barclay’s Aggregate Bond index returned approximately +2.3%.

There have been an increasing number of economic reports suggesting the possibility of slowing economic growth (domestically and globally). Some pundits believe that the ongoing trade wars’ tariffs, rhetoric, and gamesmanship are to blame due to the uncertainty they create for businesses. Other pundits believe renegotiating trade agreements is overdue and that the Federal Reserve needs to be more accommodative along the way. Regarding monetary policy, the Federal Reserve cut interest rates twice (once in July and once in September). Thus, while much energy has been spent by the investment community in recent years about what higher interest rates would mean to current bond holdings, the new realized concern is actually the opposite - what lower rates mean in terms of earning an acceptable fixed income return going forward.

As previously discussed, the current climate of higher stock valuations and lower bond yields can be challenging for investors and portfolio managers – does one take more risk in order to get the previous levels of return, or does one merely accept lower levels of return? Our contention is that an investor should neither ignore risk nor avoid risk. To wit, on the one hand, if too much risk is taken and the risk finally shows up, an investor may not be able to stay the course. On the other hand, if you seek to avoid risk completely you may end up unable to meet your goals.

We believe the important question to always ask as investors is, “Am I being adequately compensated for the risk I am bearing”, knowing that there is seldom a free lunch (return without risk). Moreover, it is essential to periodically revisit one’s need, ability, and willingness to take risk. The cross section of those three things (need, ability, willingness) is the best internal barometer an investor has to determine asset allocation. This, combined with holistic financial planning that is periodically reviewed and iterated, will ultimately help an investor stay the course to achieve their goals.


Daniel Schoenecker, CFA, CAIA, MBA
Vice President of Wealth Management

Disclosure:   Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The MSCI ACWX Index is a float-adjusted market capitalization index designed to track the investment results of an index composed of large and mid-capitalization non-U.S. equities. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index .   The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities.
Stock Options, Restricted Stock Units, and Stock Appreciation Rights

It is not uncommon for company executives to receive compensation in forms other than cash payments (salary or bonus). One of those means is company stock, which can be provided in three primary forms: Stock Options, Restricted Stock Units (RSUs), and Stock Appreciation Rights (SARs). How these stock awards are paid out and the effect they have on clients differs between the three. And, of course, the exact terms of these awards vary from company to company, so I will be addressing them at a high level. For specific questions related to your situation, please reach out to us directly.

Restricted Stock Units . Typically, RSUs are awarded annually in grants of a certain number of shares. Then, the various grants vest over a specified time period. The vesting period can either be gradual (a certain percent each year) or they can have cliff vesting which means the grant 100% vests at a certain future point in time. Normally, when RSUs are granted, there is no taxable event. However, the taxable event happens upon vesting and the taxable income is determined by using the number of shares that vest and the average stock price on the date of vesting.

Stock Options and SARs . Stock Options and SARs act mechanically very similar to each other with some small nuanced differences. Both Stock Options and SARs are granted with each grant block having a predetermined price per share, also known as “strike price”.  The stock option/right gives the client the option/right to purchase the stock (exercise the option or right) at that strike price in the future. The idea (and hope) is that the market price of the stock rises above the strike price, and you can therefore purchase the stock at the lower strike price and sell at the higher market price. The taxable event occurs at the time the client exercises his or her option/right. The taxable amount is the difference between strike price and current market price at the time of exercise.

These stock awards can be complicated to decipher, but there are many strategies you can implement to take advantage of this unique compensation element. Please contact us with any questions specific to your situation. Additionally, it is important to seek the advice of your tax professional when considering the tax impact of these transactions. 


Charles Stewart
Associate Vice President | Private Wealth Manager