Many of our clients are business owners, and while they each bring their own unique set of circumstances to the table, we often find they have something in common – when it comes to having an effective personal financial plan, they cannot possibly do it all by themselves.
To be clear, we are not talking (just) about investing. Every business owner we have worked with relies on a multitude of “partners” that focus on the portfolio, taxes, insurance, and estate planning, just to name a few. We often assume the responsibility of helping to coordinate all the elements of a complete financial plan, so that these clients can focus on what they do best – running their businesses.
No two situations are exactly alike; in fact, at times, we might recommend quite different strategies for what appear to be similar clients! With that being the case, let’s look at some specific examples of planning challenges that many business owners need help solving.
Investment Portfolio Planning
Let’s start with what we directly handle for all clients, which is their investment portfolio. Business owners, particularly entrepreneurs, are likely no strangers to risk. Still, many prefer not to compound the inherent risks in their business by accepting significant volatility through an overly aggressive investment portfolio.
To be sure, not all business owners are risk averse with their investment portfolios, and the flexibility we give our team to customize portfolios for each client truly is something we are proud of.
Although we encourage clients to think long-term and have some meaningful exposure to the stock market, many business owners that we work with like the fact that we spend a great deal of time sourcing alternative investments that seek to provide a different return stream than the stock market.
Retirement Account Planning
We see many business owners whose liquid portfolio assets represent a small fraction of their net worth, yet have still found ways to fund various retirement accounts over the years, such as IRAs and 401(k)s.
Business owners typically have input into the type of plan(s) their company offers to its employees. These days, the most common type of plan is a 401(k) plan that allows employees (including the owner) to defer a portion of their salary in a tax-advantaged account.
A wealth manager can identify opportunities to improve a company retirement plan and make introductions to key service providers like a third-party administrator who focuses solely on retirement plan design. If, for example, a business produces steady and (relatively) predictable profits year after year and is looking to shelter substantially more income from taxes than what a 401(k) allows, a cash balance plan might be worth considering. If, on the other hand, a business is volatile, this would probably be the last type of retirement plan we would recommend.
Also, if a business is volatile and has a down year (or multiple down years), a Roth conversion can be the ultimate way to make lemonade out of lemons. A Roth conversion occurs when one shifts pre-tax retirement assets to a Roth account, paying the taxes early in the process but allowing those assets to grow tax-free going forward. Since the tax rate one pays on conversion is based on that year’s income, it makes sense to do this in a year when business is not going well, and income overall is down.
Owning a business adds complexity to one’s tax planning, period. Although some SWP team members are CPAs, the reality is that we recommend that our clients (especially business owners) find a tax professional that is focused on clients just like them. We have a strong network of accountants who are true experts in advising business owners, and we defer to them on nearly all tax matters.
With that said, a wealth manager should coordinate with a business owner’s accountant to truly understand their unique tax picture, as it can have significant implications for the investment portfolio. We encourage our team members to meet each client’s accountant and let them know that we are here to help our mutual client (the business owner) and make the accountant’s life easier.
Having a well-thought-out estate plan is something we recommend to all our clients, not just business owners. But many of our clients who own businesses must plan for estate taxes, often at both the state and federal levels. Decisions can be made before or after the sale of a business to reduce estate taxes and optimize the transfer of assets to the next generation. Notice the use of the word “optimize” instead of “maximize;” sometimes, our clients are very intentional about not leaving an excessive amount of wealth to their kids!
If maximizing the transfer of wealth to the next generation is an important objective, there are certainly plenty of strategies one can consider before selling a business to reduce taxes. For example, placing shares of a private business in certain types of Trusts (such as a GRAT) can be an attractive way to create a stream of income for someone who just sold a business, but avoids substantial estate taxes down the road.
We typically run detailed cash flow projections for our clients prior to a sale of a business to show the impact of a windfall and, as is often the case, reduced earned income in the future. While these projections can be helpful in providing peace of mind that a sale should secure financial freedom for the rest of one’s life, it is very hard to mentally prepare for what it feels like to suddenly rely on an investment portfolio to replace a paycheck or a profit distribution.
We don’t write estate planning documents for clients, but we know that meaningful estate planning opportunities can be missed if we aren’t proactively making suggestions based on an intimate knowledge of our client’s overall financial picture. By getting to know our clients at such a deep level, we can complement the work of a great estate planner and often take ownership of implementing any decisions made.
We do not sell insurance, but with multiple Certified Financial Planners on staff (including some who used to work in insurance), we act as our client’s advocate by helping to identify needs and bringing in experts (or working with existing relationships) to provide actual insurance products.
If a business owner has not yet explored coverages such as buy/sell (if one has a partner), umbrella, life, or disability, there is a good chance they may have a gap in their coverage. And just as products change over time, so do one’s needs. It helps to have an advisor with no incentive to sell an insurance product. At SWP, we have built relationships with a network of insurance agents who have a demonstrated history of doing right by our clients, but importantly we do not accept any referral payments from them. We do not want to be conflicted in our advice, even if the recommendation would be the same either way.
Business owners have a lot on their plate and face many considerations when it comes to financial planning. We pride ourselves on managing complexity and delivering simplicity to our clients. By emphasizing effective communication, we strive to ensure that maintaining a sound personal financial plan does not turn into a job managing yet another person. If you believe that our comprehensive approach to wealth management will benefit you and your family, we invite you to connect with our team.
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