Business ownership has been, and continues to be, the primary path to wealth in this country. The annual Phoenix Wealth Survey consistently finds that approximately 4 out of 10 of the high-net-worth (meaning $1 million or more of net worth, not including primary residence) are business owners, and, of the retired HNW, approximately one-third were business owners/partners prior to their retirement.
Taken together, nearly 60% of the HNW market are or were business owners. Thus, to be a successful advisor in the HNW market, you are likely to have business owners as part of your practice. And to be successful as an advisor to business owners, it is essential to understand their mentality, needs and financial behavior.
For starters, HNW business owners tend to be younger and somewhat wealthier than non-business owners in the HNW market. However, they are not significantly wealthier than the average HNW household. Why? This is due to the fact that many business owners do not realize significant wealth until they liquidate their businesses. Thus retired business owners, for example, are one of the wealthier sub-segments of the HNW market.
Advisors also may be surprised to learn that only slightly more than half of HNW business owners are college-educated. However, this tends to be a generational difference, with a higher percentage of formal education found among younger HNW business owners. Similarly, while the business owner segment of the HNW market is dominated by white males today, this will change dramatically in the near future. HNW “GenX” business owners, the leading edge of whom are already 41 years of age, are more diverse in every way.
Business owners are an interesting segment of the HNW market when it comes to financial services and advisors. For example, they have a strong desire to be in control. Compared with non-business owners in the HNW market, they are more likely to agree with statements such as “I like to be actively involved in the day-to-day management of my financial affairs,” and “I prefer to deal with several financial advisors and work with each independently.” They are also more likely than the general HNW to say they make all their financial decisions themselves with little input from anyone.
Perhaps the most distinguishing feature of this segment, and one that would seem to fly in the face of their desire for control, is the fact that they are “time deprived.” They are more likely, for example, to agree that “I don’t take the time I need to properly manage my finances.” And consistent with this, 39% (vs. 29% of the general HNW) agree that “Lately, I’ve become confused about the best way to invest my money.”
HNW business owners are more likely than the general HNW to say they have a primary financial advisor, but also to receive advice from all different types of financial intermediaries. Accountants tend to play a bigger role in business owners’ financial advisory relationships than in any other segment of the HNW. However, while they come close, accountants fail to achieve the role of “primary financial advisor” in the business owner market. As with the general HNW, this position is still occupied by the full-service broker.
As mentioned previously, many HNW business owners do not achieve significant wealth until they retire, and until that time, they lack financial liquidity. For example, the 2006 Phoenix Wealth Survey found that 56% of HNW business owners have home equity loans or lines of credit, compared with 39% of the general HNW market.
This presents a special challenge for advisors looking to work in the HNW business owner market. While they own their business, these potential clients don’t have a lot of investable assets or significant dollars with which to purchase financial products. By the time they have liquidated their businesses and have significantly greater assets, however, they have been locked up by investment bankers and other planners who assisted in the sale of the business. Beyond asset management, what can provide a basis for advisors to work with business owners until they reach this major liquidity event? The Phoenix Wealth Survey points to retirement planning as that possible hot button.
As shown in Chart 1, HNW business owners have greater concerns over retirement security than the general HNW population.
This is understandable because many small business owners are not participants in pension plans, nor, as discussed above, have they taken the time to tend to their individual financial matters. Thus, for many business owners, the business liquidation event is their retirement plan. Unfortunately, this is not always as easy as it sounds. For example, there may not be a likely or timely buyer for the business, or, in the case of a family business, (and 57% of businesses owned by the HNW are family businesses) there may be several generations and other relatives working in the business who rely on the existence of that business for their livelihood.
It is also not surprising that for many business owners, the continuing income from the business is their retirement plan. In other words, many business owners don’t plan on retiring. This shows up clearly in the Phoenix Wealth Survey when we ask current business owners about their retirement plans (see Chart 2).
In focus groups that Phoenix has conducted with business owners over the years, we have heard many say how much they love their work and how they plan to work until they die. Comments such as “They’ll have to carry me out of here” and “I’ll die with my boots on” are not uncommon. And for many business owners these are probably true sentiments, although such comments probably also reflect their current age, energy level, and health status since HNW business owners, at an average age of 49, are younger than the general HNW population. Will they feel the same way when they’re 60, 65, or 70 and/or have health issues?
One has to wonder if this stated desire to work forever might also be a rationalization or surrender to the reality that they can’t find a way to extricate their personal retirement from their business without a liquidation event. This is clearly an area where advisors can help today’s HNW business owner, for many today are not getting help in this area. Specifically, 26% of HNW business owners do not have a primary financial advisor. More importantly, of those with an advisor, only slightly more than half (55%) are getting help from that advisor regarding retirement planning.