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If you're one of Chris Bidwell's competitors, be afraid—be very afraid.
The veteran Smith Barney advisor has designed a total of 55 retirement plans for small-business owners and their employees so far. Sure, margins may be thin and the work painstakingly detailed, but that doesn't bother Bidwell. That, in his view, is simply the price a savvy financial planner pays in order to capture the big prize: the mandate to handle the business owner's personal assets and those of the grateful employees as well. "If you are a competitor of mine, and you are managing the personal assets of a small-business owner but think dealing with setting up their 401(k) is going to be too cumbersome, then watch out—I'm going to handle the retirement business and I'm now looking to take over that personal account from you as well," the Dayton, Ohio–based planner warns rivals. "If you look beyond the trees and into the forest, there are so many great opportunities in working with small businesses."
Across the country, a growing number of financial advisors like Bidwell are recognizing the potential opportunities that lie in serving smaller businesses. These companies are the engine of U.S. economic growth, with millions of firms launched each year and collectively accounting for a large chunk of the country's gross domestic product and employment creation. But traditionally, their owners rarely became consumers of financial planning services until their businesses had grown very large, gone public or been sold, leaving the entrepreneur with an unprecedented sum of cash and a need for guidance on how to manage the windfall.
These days, however, small-business owners find they need assistance from planners at every stage along the way to that goal, whether it's helping them knit together a network of tax, legal and accounting experts, setting up retirement plans to retain and attract top talent or—ultimately—setting up and financing exit strategies. Meanwhile, advisors themselves are recognizing that forging rock-solid relationships with potential small-business clients is easier to do at an early stage in the entrepreneurial life cycle.
"That's when business owners need the most help, and that's when you earn their gratitude and loyalty," says Heather Hutchinson, founder of Hutchinson & Ziegler Financial Advisors, a San Rafael, Calif.–based planner with $25 million in assets under management. "By the time they have accumulated enough wealth to be attractive to most planners, they don't face some of the tough issues anymore." About half of her clients are small-business owners, and she saw the challenges that they all confront firsthand when her husband ran his own small firm. "I realized that this market can use the kinds of services planners can offer, and that relatively few people seemed to be jumping on that opportunity," she says. "It requires effort—you have to be prepared to network, to build relationships with all kinds of service providers, to listen and to recognize and work around the fact that small-business owners have very particular needs."
It's Not Just Business—It's Personal
That starts with the fact that their business and personal finances tend to be inextricably linked, as are their personal and professional identities. A planner who works with a small- business owner on the latter's personal portfolio is likely to quickly discover that a suggestion that they extract more cash from the business to invest in some kind of qualified retirement plan is often greeted with surprise or even exasperation. "Most small-business owners have reinvested all their excess cash in the business because it has been more profitable than any other investment and because they feel they have some control over the risk," says Mark Stein, a fee-based planner and president of Aegis Financial Group, a Phoenix-based firm. "I often hear them argue, 'Hey, instead of putting my money into a mutual fund, I can buy two or three more trucks and expand my business.'" At the other end of the spectrum is the exhausted entrepreneur who, after spending decades building a company, now wants nothing so much as to find a way to untangle his own finances and recoup the benefit of his labor in the form of cold, hard cash. At no stage can the advisor assume that he or she can treat personal finances in isolation from the business.
George MacDonald used to run a commercial laundry in the Virginia Beach, Va., area where he still resides today. The laundry served hotels, restaurants and medical facilities. "Not a lot of financial advisors take the time to study all of the issues that are important to a small business or its owner, or even to discuss business issues and how they relate to investment decisions rather than investments on their own," he says. So when MacDonald sold the laundry business and its real estate, he wound up working as a financial advisor with Merrill Lynch. Since 1997, he calculates, he has set up more than 100 retirement plans for small-business owners within a 100-mile radius of his office. "I knew that was an important thing to me as a business owner, so it was a niche market that I went after, especially since a lot of other financial advisors shy away from it," he explains.
For small-business owners, a planner isn't just someone to oversee their investment portfolio, but a troubleshooter who can be called in to help the owner deal with myriad different personal and business issues. The key to both penetrating and serving this market is being able to deliver anything from information to cutting-edge product solutions as efficiently and rapidly as possible. At each stage in the business's evolution, a different skill set may be required, says Tom Foster, an attorney who works for The Hartford's employer retirement plans business. "When companies are just getting going, they and their owners need to know about how to structure compensation, insurance and so on," he says. "The next step, with a growth company, is helping them book sales and build a team that will help the company boom. Then you get to transition issues—how does an entrepreneur pass that on?" At each step along the way, Foster says, an advisor may draw on different specialists, present different kinds of strategies and draw on different families of products.
Planner Scott Oeth's first contact with one client, a family-owned medical supply business, came when the couple who owned the firm contacted him with their concerns about their internal bookkeeping standards. That kind of issue doesn't fall within the scope of Oeth's advisory business (his firm, Midwest Investment Advisors, in Edina, Minn., oversees about $120 million in assets). But rather than sending them away, Oeth introduced the couple to an accounting firm that could audit and take over handling the business's books. "Turns out that some of the financial controls were a bit sloppy," he says.
Once the pressing business issues had been resolved, the couple returned to Oeth to tap his expertise for themselves. "We ended up going through the full financial planning process, but only because I was willing to make their priorities my priorities and wait until they had time to focus on planning," he says. Oeth reviewed a high-cost, poorly performing retirement plan and restructured it; set up life and health insurance plans for the family and began managing their money. He also helped the owners provide for the future care of their
special-needs child.
Creating an Expert Network
The key ingredient in winning this kind of stream of business from a small-business client, Oeth says, is an advisor's ability to serve as a kind of financial quarterback. For the past two years, he has been part of an informal study group, getting together once every few weeks with nine other professionals—an estate planning attorney, a CPA, a private banker, a business broker and others—to chat about issues they are confronting in their practices and to learn from one another. Not only does this help him serve his clients better—and give him a network of other experts on whom he can call when necessary—but the group also serves as a source of referrals. "They are specialists, and when they need a deep generalist who can coordinate all the pieces, they can come to me," he says.
Finding small businesses in need of planning services may be the easiest part of the process, agree advisors. "Just show up at local chamber of commerce events," says Norman Mindel, a Chicago-based advisor with Genworth Financial. "Sometimes you'll get the personal business first; say, a client who's not happy with their portfolio. You solve that, and then you get asked to look at their pension plan and end up doing work for their senior employees as well." In some cases, one small-business owner will ask another how they set up the company 401(k) plan—and a referral follows.
Serving all the needs of those new clients is far more difficult than identifying prospects, however. For Anne Bedinger, associate vice president of investments at Raymond James & Associates in Orlando, Fla., the process sometimes starts with spending time at the company itself, to better understand what actually happens within its walls. "You learn what kind of environment they work in, what their daily schedule is like, how their employees interact, what the travel and time demands are, and get a feel for the kinds of services that they need," she explains. Even then, it can take time for clients to be able and willing to work with a financial planner. "Maybe a year, maybe five years," cautions Smith Barney's Bidwell. "This does not happen overnight."
Planning Made Easy
In part, that's because most small-business owners are caught up in the day-to-day demands of running their businesses. Taking their eyes off the ball for even a short time can feel to them as if they're neglecting their chief responsibility. For the advisor, that means minimizing the time spent meeting face-to-face, and maximizing the amount of research done before and after meetings.
"These are people spending at least 80 hours a week on their business and worrying about meeting payroll," says Mindel. "What they need from an advisor is someone to step in and say, 'Let me organize the meeting with the lawyer,' or 'Let me just bring in the research with my recommendations.'" That way, he explains, the advisor isn't just coming to the entrepreneur-client with a list of problems—they need a buy/sell agreement with their partner, a retirement plan for key employees, a diversified portfolio, etc. "Instead, you're the guy bringing them the solution to every problem that it's your responsibility to raise," Mindel adds.
When small-business owners relegate what seem to be mundane tasks to the back burner, it's up to the advisor to recognize which ones are critical to the client's long-term financial health—and then find a diplomatic way to bump them further up the to-do list. When Stein's clients resist taking free cash flow out of the business, and point to the fact that the business has grown in value more rapidly than most mutual funds, Stein finds ways to point out that it's not only about return, but also about risk management. "We have to get them to realize that one day, that business growth may not be there—perhaps because there are more competitors, demand for a product dries up or a new regulation hurts the market," he says. "Perhaps the business will need too much capital to get it to the next level. It's one thing to have the business as their single biggest asset—but something else if it's their only significant asset."
Coming Up with an Exit Strategy
Inevitably, the biggest issue confronting the small-business proprietor is one all Americans must deal with: retirement. For an entrepreneur, even saving can be tricky. "You could be working with an architect whose earnings are really uneven—minimal for a few years, then he'll have a bumper year," Hutchinson points out. "How can you persuade someone to save in a lean year? These are the kinds of issues you'll be called on to think about."
Many of Hutchinson's business-owner clients signed on after realizing that they needed to start pulling money out of their companies to provide for retirement, and didn't have a clue where to start. Part of this can be accomplished by setting up the kind of pension plan in which Bidwell and MacDonald specialize. "But I need to know whether their goal is to get as much as possible out for themselves, or whether they see the plan as a key benefit for their staff, who also will have to provide for their own retirement," Hutchinson explains. Indeed, both Bidwell and MacDonald say that asking questions like that and structuring the plan—choosing between, say, a profit-sharing and an age-weighted plan—in response to the answers, is a vital role planners play. "If you get it wrong, you'll be cleaning up the mess within a year or two," predicts Bidwell. "And then the client is unhappy as well."
But even when a business owner is able to direct a steady stream of cash out of the company and into a retirement plan, odds are that he or she will still need to find a way to monetize the value of the business in order to fully fund his or her retirement. Sometimes, even when a client can't see an exit sign, an advisor can step in for a second look.
For example, Stein described a situation in which the owner of a wholesale distributing business came to him, worried by the fact that although he had a good income and a solid book of clients, he couldn't figure out who would be interested in buying his business down the road. "We suggested that he contact someone he respected in his field," Stein recalls. "It turned out that the other guy had the same kind of concern, so they agreed to a contract that gave both the right of first refusal on the other's business should one of them die or become disabled."
Under the formula—worked out by a CPA under Stein's supervision—the valuation parameters were established. The two men agreed that the purchase price would be payable over a two-year period. The purchase itself would be funded with 30-year life insurance policies that the men took out on each other. Once the buy/sell agreement was in place, Stein says, he ended up not only structuring a retirement plan for employees of both companies, but also working on the grateful client's personal portfolio.
"You never know where this road is going to take you, and you need to be prepared to wear all kinds of hats, from business valuation negotiator to family psychologist," Stein says. One minute, he says, he could be helping a client develop a cash flow projection for his business; the next, he's trying to find a way for a client's child to take over a business without jeopardizing the client's retirement.
"What do you do when your retirement income is based on your kid's ability to do well in business, and you're worried about that?" says Richard Simmonds, managing principal of Laird Norton Tyee, a Seattle-based wealth management firm that works extensively with family-owned companies. The succession issue is further complicated by the extensive set of relationships a small-business owner must consider. "Customers, vendors, employees—whatever kind of planning or advice solution we're doing, we have to think about those constituencies as well as the junior generation within the biological family," Simmonds adds. "But then, no one said that this job was going to be easy."
SIDEBAR: Small-Business Stats
- Firms with fewer than 500 employees represent 99.7% of all employer firms.
- They employ about half of all nongovernment workers.
- They have created 60% to 80% of net new jobs annually for the past decade.
- 53% of small businesses are home-based; 3% are franchises.
- They generate about 50% of the U.S. private, nonfarm domestic product.
Source: Small Business Administration
Suzanne McGee is a freelance writer who covers business, investing, and philanthropy. She contributes frequently to Financial Planning.
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