Thinking Small (In a Good Way)

Harlan Kappel isn't a typical financial planner. For starters, Kappel, with American Express Financial Advisors in Dallas, declines to advise clients on asset allocation, portfolio diversification, mutual fund investments and the like. Indeed, he hardly deals with investments at all. Further, Kappel usually keeps his thoughts small as in small business. Kappel is part of a growing number of advisors

Harlan Kappel isn't a typical financial planner.

For starters, Kappel, with American Express Financial Advisors in Dallas, declines to advise clients on asset allocation, portfolio diversification, mutual fund investments and the like. Indeed, he hardly deals with investments at all. Further, Kappel usually keeps his thoughts small — as in small business.

Kappel is part of a growing number of advisors who focus their practices squarely on business owners. As such, most of his time is spent helping clients in developing their employees' management skills, structuring their business operations and allocating shares of the company to family members. His partner, Sean Brown, takes care of clients' more traditional financial needs.

The divide-and-conquer system is one Kappel and Brown developed about three years ago to better serve the needs of the 40 or so small companies they work with — and it has worked well.

Since introducing the team approach, Kappel says many of his clients' businesses have mushroomed in size. One, for example, went from $30 million in sales to $60 million in two years and recently had a public offering. Another increased revenues from $860,000 to $5.6 million in the three years before the owner sold it “with enough to retire on,” says Kappel, who also won the accounts of the company's top three executives.

“I haven't found any financial advisor working with small business who can do it all,” he says.

Small, Not Insignificant

With about five million small businesses (fewer than 500 employees) operating in the U.S., there's plenty of room in the market for willing reps.

The initial opportunity, of course, lies in selling retirement plans, insurance and the like to the company itself. But savvy reps, like Kappel, turn a double play by getting the personal business of the company's owners and employees as well.

Caveat emptor: Small-business owners are not the usual client. They tend to be highly protective of their companies and slow to trust advisors. These characteristics make them a long sell. Plus, as Kappel discovered, they often require unconventional techniques.

The trust factor is probably the thorniest issue.

“The company is their baby,” says Bill Amos of Amos Financial Services in Santa Rosa, Calif. “They tend to be very cautious.“

The surest route to winning trust is by building up a referral network — lawyers, accountants and assorted other professionals who can help you get past a business' gatekeepers.

“I want to be referred by an influential advisor,” says Irving Katz, whose Katz Insurance Service and Katz Retirement Service in Irvine, Calif., serves “hundreds” of small-business clients.

A favored Katz tactic is to direct business toward likely referral sources, thereby putting pressure on them to return the favor. In addition, he gives monthly financial planning seminars at meetings of CPA organizations and other professional societies.

Another successful tactic is to communicate that the success of the business is a primary concern. John Reddish, a Philadelphia-based small-business consultant, suggests that advisors bring up four or five topics unrelated to their own business (the role of the owner's children in the company, for example, or plans for growth) for every one topic near and dear to their own wallet.

Another approach is to start small, perhaps by selling the company a 401(k) plan and then building from there. The building process is one that Amos knows something about. He has been able to parlay many of his business-only accounts into relationships with the companies' top executives. To that end, he holds frequent get-togethers: an enrollment meeting once a year, in addition to twice-a-year meetings to address questions. Plus, he makes sure employees are aware they can contact him with questions at any other times of the year.

Come Again?

One of the most important things to remember in pitching a small-business owner is this: Keep it short. They have notoriously short attention spans — an outgrowth of having to constantly juggle many things at once.

“They're usually being pulled in all sorts of directions at once,” says Bruce Fenton, an advisor with Atlantic Financial in Westborough, Mass.

This means that preparation is key, and making an airtight presentation with bullet points and lots of numbers greatly aids the cause. Because they are so focused on the day-to-day aspects of their businesses, owners often don't understand investing basics the way most high-net-worth executives do. As a result, a lot more education is usually necessary to land the account.

Indeed, education could well prove the most time-consuming task, but it's also an effort that can forge strong ties between the advisor and the business owner. Katz devotes the first two to three meetings with small-business owners imparting financial lessons.

After the first meeting, he usually sends the client off with a packet of information on investing and other financial topics. When they meet again, he quizzes them on what they've absorbed. If he's not satisfied with their answers, he'll go over it all again, and if that's not enough, he'll bring in the client's CPA for reinforcements.

If it sounds like a lot of effort, Katz maintains it's worth it.

“I want them to be educated enough so they understand the value I'm bringing to them,” says Katz.

As important as choosing the right company to approach is finding the right executive within the company to pitch. Of course, you need to target decision makers, but these are not always the occupants of the most obvious posts, even in a small company. In some cases, a secretary could play a significant role in the sales process.

“Don't assume certain employees don't have power,” says Fenton. “I've had situations where we closed without ever even meeting the owner.”

The Holistic Enchilada

For many advisors, the ultimate key to winning small-business clients is, as Kappel says, “to take a holistic approach.”

That means becoming a lot more than a financial planner, and turning yourself into a sort of business advisor as well. The bad news is that this takes a lot of work, especially in the beginning.

“Small-business owners don't really perceive themselves as being separate from their business,” says Scott Reynolds, who runs Lincoln Financial Advisors/Reynolds Financial Group in Joliet, Ill. “You have to spend a lot of time uncovering the things that keep them up at night. Once we know those, we can deal with more traditional areas of finance.”

Reynolds notes that when he first met the four siblings who ran a client company of his, he discovered they had been wrestling with a tricky problem for several years, but had been unable to find a way out. One of the siblings wanted to retire, and they couldn't figure out a method for structuring his departure in a way that gave a fair deal to all involved.

Reynolds decided to talk to each family member to determine each person's goals. Then he met with the group and developed a plan that would give the retiring sibling enough to live on and leave the business enough cash flow to continue to grow.

“By starting with the personal and moving back from there, we made the process work,” he says.

Those advisors who embrace the comprehensive tact have to deal with all sorts of business issues specific to small companies. The biggest is probably the matter of business continuity — what happens if the owner retires, dies or becomes disabled. This affects everything from setting up a buy-sell agreement with father and son to determining how much control to give various children to how to institute compensation plans that will retain key employees during the regime change.

Katz recently set up a deferred compensation plan for two crucial employees at a general contracting company. The key feature was a 10-year vesting period that could keep them in the business until the owner's son takes over, plus a stake in the company.

Belly Up

There is one huge downside to the small-business market: its high rate of business failure. The majority of companies don't make it past their fifth year, which means advisors must vet potential clients well.

“You can't open your doors to everyone,” says Greg Large, a managing partner with Lenox Advisors in New York, which, in addition to financial planning, provides retirement services and benefits consulting.

Large protects himself by focusing on a few industries — commercial real estate, law, investment banking, hedge funds and venture capital — and requiring a minimum of $1 million in investable assets for individual accounts. Furthermore, if a company is below 10 employees, he requires a fee of $2,500.

It's a strategy that's paid off so far. The firm now has about 40 employees, up from six eight years ago, and 80 percent of its business is from small businesses.

It just goes to show you: The small-business market can be a big one for many reps — just make sure you understand the terrain.

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