While many advisors work extensively with successful small business owners, many struggle to properly serve that client segment, because they underestimate the role and impact of the most important asset in such investors’ lives: the business itself.

Thanks to the bold and daring approach such clients take to building their companies, their businesses are often the most aggressive investment in their broader portfolios.

The same positive outlook that is so vital in building a successful company can sometimes obscure an entrepreneur’s view of the importance of near-term planning and risk management.

They frequently underestimate the need for a diversified portfolio of traditional investments, since they believe they will eventually sell their company for a premium valuation. Unfortunately, this approach can expose them to undue risk if the business stumbles.

Financial advisors have an absolutely vital role to play for business-owner clients by helping them to see how their company fits into their broader portfolio and how to protect it — and their personal financial plans — from risk.

These three best practices are a great place to start:

1. Help them separate their personal finances from the business.

Many entrepreneurs overcommit personal funds — including retirement savings and emergency reserves — to help their companies get off the ground.

As a result, the line between personal and business finances gets blurred, leading to risky missteps such as taking out personal loans or lines of credit to fund business operations, rather than opening these financing options under the business itself.

Advisors can help clients resolve this by stressing the importance of developing a “personal business plan.” For many entrepreneurs, the exercise of drafting a formal plan for the business — complete with a list of goals, a statement on growth strategy, revenue streams, expenses, related properties and assets and key individuals — is a familiar exercise.

By using the traditional business plan as a framework, advisors can “speak the client’s language” and help them understand how a written plan, which incorporates their dreams for retirement or travel, the legacy they want to leave for heirs or charitable causes, their lifestyle priorities and their wealth across all assets and accounts, can help them take a realistic look at upside and downside scenarios for their personal life and steer them toward personal success.

2. Implement risk management strategies that protect the business from the rest of the portfolio, and vice versa.

Business owners who do realize the need for a more traditional investment strategy often display tendencies that continue to expose them and their portfolios to unnecessary risk, including investing in companies within their business’ industry or those adjacent to it.

While it’s understandable that they would want to invest in sectors they know well, this approach can lead to untenable concentration risk, in effect, doubling down on the performance of a single industry sector even as they try to diversify their portfolios.

Advisors should guide business owners toward allocations in fixed income securities, such as Treasuries or baskets of investment grade corporate bonds, to offset the financial fluctuations inherent in running a business, and provide entrepreneurs with genuine downside protection.

To the extent that advisors can also help business owners with insurance solutions, including health coverage, long-term care and key person insurance, they can add further value in the risk management arena.

3. Establish a “democratized family office” approach to assist with the full range of clients’ needs.

Successful business owners are great at delegating. Advisors would be well-served to leverage such clients’ familiarity with this practice to establish a “democratized family office” that can effectively tackle the broad array of complex challenges these investors and their heirs will face.

Specifically, this means coordinating with a team of other trusted professionals — potentially including an accountant, corporate attorney, estate attorney, insurance specialist, and private banker — to share relevant information on the entrepreneur’s financial plans, documents and developments.

This team can help the advisor and the client stay on top of everything from tax reporting to legal issues and property protection for both the business and the client’s personal investments, estate planning beneficiaries and life circumstances.

This comprehensive approach is, in my experience, the only way to ensure that nothing pertinent to the client’s business or life goals slips through the cracks.

The days when advisors could take a “hands-off” approach to their entrepreneurial clients’ businesses are over. To provide the holistic guidance business owners need, advisors must be equipped to view these clients’ companies as vital assets within their broader portfolios — while at the same time understanding their impact on the clients’ broader risk management needs.

The three steps above can help advisors remove blind spots that may develop from a fragmented approach to treating the client’s business and personal portfolios separately and lead to better long-term outcomes for these valued relationships.


Greg Powell is President and CEO of fiplanpartners.com, a wealth management and financial planning firm based in Birmingham, Alabama.

Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.