A Different Breed

Tending to the financial needs of a family-owned small business is a complex affair, but it's not nearly as unique a task as it might seem at first blush. To be sure, the owners of these businesses have a number of concerns that set them apart from your garden-variety affluent American buy/sell agreements, key person insurance and the emotional challenges of working with relatives, to name just a

Tending to the financial needs of a family-owned small business is a complex affair, but it's not nearly as unique a task as it might seem at first blush.

To be sure, the owners of these businesses have a number of concerns that set them apart from your garden-variety affluent American — buy/sell agreements, key person insurance and the emotional challenges of working with relatives, to name just a few.

But, based on a recent survey conducted by Prince & Assoc., they also have a number of issues in common with other wealthy Americans, including out-of-date financial plans and the yawning gap between the products and services they use and those they profess to be interested in.

Survey Sez

Earlier this year, we surveyed 387 family-owned small businesses with a combined net worth of more than $6.5 billion. To be eligible for the study, the companies had to meet the U.S. Small Business Association's broad definition of a small business: no more than 500 employees and no more than $6 million in annual receipts from nonmanufacturing industries.

According to the SBA, there are 22.9 million small businesses in America. The group, which comprises 99.7 percent of all employers, accounts for 40 percent of private sales, employs 50.1 percent of the private workforce and produces approximately 75 percent of all new jobs. In short, small businesses, as a group, pack a large punch, economically speaking.

To qualify as a family business, a small business must employ one or more family members in a senior position. In addition, more than one generation of the family had to be involved in the business, and the family had to hold a majority stake, while intending to retain that controlling position.

Among the 387 respondents to our survey, the average age was 57 and 71.6 percent were male. The businesses, on average, had 124.5 employees. Most important, from the financial advisor's standpoint, the small-business owners had an average individual net worth of $17 million, including the estimated value of their share of the family business, and discretionary investable assets of $2.1 million, excluding retirement savings or deferred compensation.

To help handle their personal and professional finances, they had, on average, 1.8 financial advisors working for them. Brokers were most likely to get the job of primary financial advisor, followed closely by independent financial planners.

Primary Financial Advisor
Broker 31.3%
Independent financial planner 23.5
Bank/trust officer 16.8
Money manager 14.5
Accountant 8.8
Life insurance agent 4.7
Lawyer 0.5
How Respondents Found Their Primary Financial Advisors
Referral from accountant or attorney 77.8%
Referral from another business owner 26.4
Referral from a friend or relative 9.8
Seminar or conference 7.0
Read about them in the press 3.1
An advertisement 0.8
Direct mail 0.3
Cold call 0.3
Motivations for Creating or Managing the Business
Desire to control their own lives 98.4%
Want to be their own boss 94.8
Wanted to accomplish/build 79.8
something significant
Needed a job 58.5
Work with their family 43.4
Outdated Plans and Products
Have Last Updated
Estate plan 64.3% 12.8 years ago
Key person insurance 57.9 10.6 years ago
Buy/sell agreements 37.7 12.4 years ago
Financial Products Used
Use Interested in Using
Life insurance 79.8% 0.0%
Mutual funds 74.7 2.3
Individual securities 66.7 0.3
Annuities 22.7 8.0
Private money managers 20.9 65.4
Hedge fund of funds 0.0 78.0
Hedge funds 0.0 77.3
Managed accounts 4.9 62.3
Private equity/private equity funds 0.0 32.6
Planned Gifts
Use Interested in Using
Will bequests 47.5% 0.0%
Donor advised funds 6.2 28.2
Charitable trusts 4.9 71.6
Private foundations 0.5 78.3
Corporate foundations 0.3 74.2

Source: Prince & Assoc.

In terms of how respondents find their primary financial advisor, referrals were far and away the most popular source. The referrals typically hailed from “centers of influence” — accountants, attorneys and others who work with the client on other matters affecting their finances.

When asked about their primary motivations for running their own business, respondents placed control and autonomy at the top of the list. These are typical concerns of high-net-worth clients, of course. Surprisingly, though, working with family members finished a distant fifth.

Procrastinators R Us

For all of their desire for control, however, respondents were not as conscientious as they might be when it came to their financial affairs. Though the majority had an estate plan, for example, those plans typically had last been updated more than 12 years ago — a lifetime, if you consider the degree to which personal and professional circumstances change from year to year.

A majority of respondents had “key person” insurance to cover themselves and other difficult-to-replace employees. But, again, these policies typically had languished for more than a decade. Only about one-third had buy/sell agreements in place — documents that govern how business equity would be distributed among co-owners if one of them died. Those that had such documents had neglected them in much the same way they had their insurance and estate plans.

This outdated paperwork represents a golden opportunity for financial advisors to get a foot in the door and to demonstrate their value to some new clients.

A similar opportunity for financial advisors showed itself in the category of financial products. The products the small-business owners most often use are, without exception, ones that they had little or no interest in down the road. Further, with the lone exception of money managers, none were using the products or services they wanted to know more about.

It should also be noted that in the case of some of these products — life insurance, for example — the lack of interest is a problem, because such products need to be updated on a regular basis.

Lastly, the survey looked at planned gifts and charitable contributions. Strangely, the respondents said they are interested in products that barely made the radar in terms of actual use, with foundations and trusts topping the list.

In aggregate, these numbers spell opportunity for financial advisors. It's hard to remember sometimes, but small-business owners are members of the vaunted high-net-worth demographic.

Sometimes small means big.

Writers' BIOS:
Russ Alan Prince
is president of Prince & Associates.

Hannah Shaw Grove is managing director at Merrill Lynch Investment Managers.

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