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What Advisors Need to Know About Business Owners and Millennials

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Deep-six that image of millennials as a self-serving, all-about-me generation.

Indeed, according to a “Why of Wealth” study, over the next five years affluent young business owners are placing high priority on being philanthropic. So says David Murphy, head of wealth advisory for Boston Private, in an interview with ThinkAdvisor.

According to the survey, 60% of millennials feel the greatest sense of responsibility to give back — the biggest share of any age group. The study was commissioned by Boston Private, a subsidiary of Boston Private Bank & Trust, and released in June.

It focuses on affluent individuals’ motivations for pursuing wealth — and associated costs therein (guilt, for example).

In the interview, Murphy discusses specific ways that advisors can help clients relevant to the survey findings.

Out of the 300 respondents, ages 25 to 65 with $1 million to $20 million in investable assets, 41% were business owners. More wealth is created through entrepreneurial activities than nearly any other sort, argues Murphy, an Army colonel who last year joined Boston Private from TD Bank, where, as investment director, he oversaw eight states. Before that, he was a Chase Manhattan Bank portfolio manager.

The survey found that business-owner respondents — mostly millennials — focus more on investing as the main driver of wealth accumulation and attach more importance to investment performance than do corporate employees.

ThinkAdvisor recently interviewed Murphy, on the phone from his Boston office. The conversation turned to the Colonel’s explaining why, when he was working at TD Bank as the financial crisis was winding down, the Army ordered him to Afghanistan.

Here are highlights:

THINKADVISOR: Over the next five years, more business owners vs. employees plan to change the way they use wealth, the survey says. What’s one example?

DAVID MURPHY: One of the surprising things was how millennials are much more philanthropic than is presumed. They put a strong emphasis on passing on wealth to children and philanthropic giving. Many of the millennials — both business owners and [employees] — felt a great sense of responsibility to try to give back their wealth.

Therefore, tax-planning and inheritance management carry more weight vs. 10 years ago, the survey notes. What does that mean to FAs?

This is the kind of advice people are willing to pay for, and advisors need to develop emotional intelligence and listening skills to provide it. If they pick up on that, they’ll become successful top advisors in the long run.

The business owners — who were mostly millennials — focus more on investing as the main driver of wealth accumulation and philanthropic giving, the survey showed. How can advisors help?

A productive client review is one in which the advisor understands what part of the life cycle the client is in and identifying their internal benchmark. Are the investments supporting that? The most important benchmark is the client’s personal benchmark, and the asset composition should reflect that. Therefore, the S&P 500 isn’t the best benchmark.

When looking for a financial partner — including a financial advisor — to help achieve goals, business owners, more than non-business owners, look at investment performance, transparency and reputation, the survey showed. Are they looking for great returns?

Good investment performance is a baseline requirement – we have to provide that. I’m not saying “great” performance because to achieve that year over year, you may have to assume risk that isn’t consistent with the client’s understanding or appreciation of their long-term goal.

About eight in 10 business owners said their wealth priorities have changed over time. Such as?

For example, moving their business to a second or third generation of family members. This driver isn’t felt by individuals who work for a government agency or a large company. But it’s deeply felt by business owners. Many advisors who don’t provide a level of expertise and guidance [to address this] will find themselves coming up short when clients start to reach that point in their lives.

(Graphic: Boston Private)

How specifically can FAs help when clients want to transfer their business?

With buy-sell agreements, legacy planning, key man insurance [on the owner]. These are all concerns of business owners as they mature in their life cycle.

You mentioned emotional intelligence — the ability to manage one’s own emotions and to understand and influence others’ emotions. Why is it essential for advisors to develop that?

Because transitioning a business or engaging in philanthropy, for example, aren’t just about mechanics but understanding when the client is in the right part in their life cycle and [in a place] emotionally to do so.

FAs haven’t been encouraged to focus on emotional intelligence and other soft skills until fairly recently. Why is this so important now?

We’re at a time when clients are willing to pay less and less for investment management. But they’re willing to pay for advisors who can combine good investment performance with good advice and emotional intelligence in terms of the timing of that advice.

Business owners’ biggest motivation for accumulating wealth is a passion for their business. Most of the entrepreneurs surveyed were in the younger age range. Is youth the reason for this finding?

All the business owners had that deep passion. This is important for advisors to acknowledge so they can support the business owners’ endeavors.

(Graphic: Boston Private)

Business owners were more inclined than employees to attain feelings of excitement, inspiration, dedication and passion from their wealth. Why is there that difference?

The failure rate of startup businesses is pretty high. As they struggle to build a business and make it a success, their [company] becomes an extension of the [entrepreneur’s] family. However, the survey showed that business owners have a sense of guilt because this took [time] away from their [real] family.

Business owners give more importance to success in life vs. non-business owners. Why is that?

Because it’s personal. If you’re working for ABC Company and lose your job, it doesn’t have the same impact as if you started a business and five years later, you went bankrupt.

Business owners worry more about people’s expectations and being judged by their status as opposed to employees.

They’re much more concerned about their relationships in the community than people who work for big organizations. So they take criticism of their business personally.

The survey found that business owners experience only the illusion of happiness in contrast to the happiness to which they aspire. They don’t genuinely feel happy?

Many ultra-high net worth individuals pursued wealth to enjoy a better life; but when they got north of $15 million, it’s a case of diminishing [happiness] returns. I suspect it’s because when you already own two homes, does a third home bring you more happiness?

The survey showed that Gen X and baby boomers feel gratification and satisfaction about their wealth more so than millennials, who feel responsibility about it.

That’s consistent with the finding that millennials as a generation are more actively engaged with philanthropy than we presume. They aren’t the self-serving, all-about-me generation.

Only 33% of business owners, vs. 46% of employees, cited as a priority preparing for a comfortable retirement. Surprising — or not?

Not. The business owner is trying to build a legacy. Someone working in a big corporation probably already has a pretty well defined benefit package, whether it’s a 401(k) plan or stock options [etc.]. But all of that rests on the business owner’s [shoulders] to [manage].

Gen X puts more emphasis on tax planning and inheritance management than they did a decade ago. How can advisors serve them?

Both Gen X and boomers are more interested in tax planning and the ability to transfer wealth in the most tax-advantageous way possible. Planning for giving and the intergenerational transfer of wealth becomes more a concern for them than for millennials, who are still in the accumulation stage.

What’s the most outstanding finding about the pursuit of wealth when it comes to differences between men and women?

Women didn’t show as strong an interest or engagement in accumulating wealth as men did. But it might be that the millennial generation needs to mature another 10 to 15 years to see those numbers start to change.

By the way, I was interested to read in your bio that you served in the Army in Afghanistan. At what point?

The summer of 2009 to the summer of 2010. I was in the Reserves. I’d been an active Special Forces officer earlier in my career. In the winter of 2009 — I was [with TD Bank] — I got a phone call, and 90 days later, I was in Afghanistan reporting to Gen. Mike Flynn [former national security advisor to President Donald Trump].

What was your assignment?

To build out an element that would help track and stop insurgency [funding] in Afghanistan. The Bush administration wanted to understand that flow of money, so they created the Afghan Threat Finance Cell.

Why did they call you, specifically?

They wanted a Special Forces officer who knew something about finance and banking. I was given pretty much a white board that said [in effect]: Figure this out. What I didn’t know was that I was the fourth colonel in nine months in the job — they’d relieved three other colonels before I showed up. But — with partners in the drug enforcement agency, Treasury and others — we were able to figure it out.

Wow. You jumped right from the financial crisis to Afghanistan!

A friend of mine said tongue-in-cheek: “Things are so ‘great’ in the banking and financial world in the U.S. that spending a year in Afghanistan will be a safer place for you.”

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