Ask the Advisor: Barajas on Guiding Small-Business Owners

When most people think about retirement plans, Social Security immediately jumps to mind. Next comes company pension plans. But those don’t help individuals who are self-employed or entrepreneurs and start their own small companies. What can they do to protect their retirement years?

Financial advisor Louis Barajas specializes in self-employed and entrepreneur clients, and offers his advice on where to start. Whether self-employed or entrepreneur, the process begins with mapping out how you expect your life to unfold. And in the case of entrepreneurs, it also means investing in the eventual retirements of the loyal workers that will be with you on the journey.

Q: Please tell us a little bit about your firm, who your clientele are, and what your specialties are?

Louis Barajas: We are a fee-only comprehensive financial planning firm and we really cater to two types of groups, which are entertainers and entrepreneurs.  With entertainers, we’re kind of business managers and financial advisors to several internationally known Latino entertainers. And we also cater to people who are entrepreneurs. I started my firm helping out my father with his business. We have small businesses to medium sized businesses, and most days I work directly with the owner of each business; and retirees.

Q: In terms of your direct clientele, approximately what percent would you say are people that are self-employed?

Louis Barajas: I would say now about 60%.

Q: What are some of the major differences that a self-employed person faces in terms of their long-term retirement needs versus someone who is with an employer?

Louis Barajas: The biggest difference is what I call the roller coaster effect, which is cash flow. If you have an employer you get a check every single week, or biweekly, or monthly. They don’t have a predetermined check. Their paycheck will vary, based on their sales; the economy; a lot of different things. And so their money sometimes is very erratic. It is up and down like a roller coaster.

Q: How difficult is it to convince a self-employed individual that they should be making investments in their own retirement?

Louis Barajas: Instead of focusing on the strategies of what a retirement plan is, or which retirement plan would be best for them, I actually have a conversation about their personal lives 30 years out (depending on how old they are), and focus on what’s important to them. I get their mind off of focusing on the economics. I focus more on what their life is going to be like in 15 or 20 years.

Also, I focus on how they want to see their business completed 5, 10, 15 years out. I have them give me a vision of what their business would look like if were all complete and done, and they were ready to sell it. Then we go back and discuss, would you need any employees, or not need any employees? What kind of employees would you need? And if you needed them, how would you attract them? Would you attract them with having no benefits? Some benefits? Would a retirement plan be an inducement to attract good people—the kind that will work to help you grow the business to the vision that you’ve seen in your mind?

Maybe I am starting them off with retirement plans that aren’t very costly, so that at least there is a plan for the employees. If I focus just on them, they say ‘I can sacrifice on me in order to get the business to grow.’ But if I can actually tie the retirement plan as part of the growth of their business than all of a sudden they’re seeing it from a different angle.

Q: I would assume that because so many of your clients are entrepreneur types that they envision they will always be self-employed or always be working for a very small business and not see that as a temporary phase in life. Is that correct?

Louis Barajas: Yes. What happens is that once people get the taste of freedom, not having anybody looming over them, and they have the taste of controlling their own destiny—even if they at the point of really struggling or in survival mode—it’s hard for them to go back, to think of themselves as an employee for someone else.

Q: Walk us through the type of advice that you would give a self-employed individual at the various stages in their life. Decade by decade, if you were sitting down with a new potential client, what would you be advising them at that particular stage? Let me start off with a millennial customer. Someone you are meeting with for the very first time. You are getting their personality profile together and you’re advising them what to do in their 20s, if they expect to be self-employed their whole career. Focusing on that age bracket, what would your advice be?

Louis Barajas: At that point what I’m doing is guiding them through the entire process—all the core functions— of what you have to do to run a business. Again, we’ll go through one area of marketing, one area of HR, if you’re going to have to hire people, etc. But then we also get to the point of finances, internally from the business and externally for their own personal finances.

At that point a major core function I want to focus on is an area of finance within their own business – the financial statements; making sure that they have the proper bookkeeping and they’re recording how much money they’re making and what their liabilities will be for taxes. I will tell you that the biggest problem at the beginning with most entrepreneurs where they do get into trouble is in the area of taxes.

So we take that into account and show them how a retirement plan will help them minimize their tax liability. Entrepreneurs hate paying taxes. They hate it. They hate making quarterly payments. You can show them how having a retirement plan in place is another way to help toward their future goals, but also minimizes their current taxes.

Q: So now we’re talking about the client in their 30s. What are you advising them at that phase?