Nearly 70% of small business owners surveyed by Paychex say that they have little or no confidence that they’ll be able to retire by age 65. It’s true that many don’t really want to retire. But health or other issues don’t always leave it to choice.
Owning and running a business makes retirement planning harder. There are many more demands on money and attention than for employees. Payroll, contracts, and business taxes to name a few. It can be complex. And most financial planning advice is just not relevant to the owner.
Business owners do want guidance. The majority of them are baby boomers according to a recent Small Business Trends survey from Guidant Financial. And 70% of owners have no idea how much they will need to retire according to an American Express survey.
Complexity was on the rise even before the COVID-19 pandemic. Low interest rates. Market turbulence. Inadequate savings. Family dynamics in a small business. Estate and tax planning complexities. Clearly there is a lot to process and sort through. Where are owners turning to get help with this?
Most owners currently turn to their CPA as their primary financial guide. Tax planning is crucial. To financially plan solely through the topic of taxes, though, is a mistake. The majority of your CPA’s time is focused on making a historical record…not on planning for what’s next.
Think about it. A typical CPA may be responsible for completing 500 tax returns per year. Given the complexities of business owners, can this one person also proactively plan the bigger picture of a business owner?
Why aren’t business owners turning to financial planners for the forward looking advice then? The problem is that the advice delivered is too simplistic for most business owner’s needs. To take a few data points and spit out a goal coverage number is meaningless to most business owners.
Much of the financial planning done by professional advisors is seen as a ‘loss-leader’ to get assets under management or other revenue. This is true whether the advisor is in a traditional wealth management firm, fee-only, or RIA/Independent firm.
Small business owners routinely have up to 80% of their wealth in their business and real estate. So planning cannot be relevant if it’s only based on 20% of a family’s overall assets. The business is ignored because it’s seen as an illiquid asset that doesn’t generate fees. This does the business owner no good.
Wealth management must include the value of the business asset. The business’ worth and the drivers of value must be understood. There must be a clear understanding of how much money will be needed in post-business life. If there is a gap between what is needed and reality, the gap needs to be filled. Often, the most effective means to fill gaps for business owners is to grow the value of the business. This can be done systematically in collaboration with other professionals. Many of the same actions that drive value also make the business more transferable.
Executing this planning correctly means that the paradigm must change. Paint by numbers approaches won’t work. Planning cannot be a ‘loss-leader’ to sell insurance or other products. The whole team must understand the value of the business and the drivers of that value.
For entrepreneurs, business is personal. Financial products and investment strategies must be part of a bigger picture. The greatest impact is often made by helping the owner grow the business’ value and make it truly transferable. The wealth management model needs to evolve to deliver better outcomes for business owners. The focus must shift from asset fees and commissions to growing the overall wealth of the entrepreneur.