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When The Enemy Is Us

The same behavior that made “small” business owners wealthy—a yen for risk, strong self-confidence—are NOT the same ones that will keep them wealthy in retirement

Scott Sparks, a Denver-based wealth-management advisor, recently told me about his client Jim, a 57-year-old remodeling contractor in Denver, who cut his 70-hour work-week in half to spend more time on his boat. After three decades in the business, with 50 employees, $25 million in annual sales, and personal income of about $1 million per year, Jim was ready to transition into retirement. The problem? Jim was having trouble overcoming his drive to “do it all” and delegating management of his portfolio to an independent financial advisor.

This is a common problem for financial advisors who counsel small-business owners. Government data show that many of the heads of the more than 25million small businesses in the U.S. are middle-aged or older. Rates of self-employment in incorporated and unincorporated businesses rise with age and people age 45 and older constitute a disproportionate share of the self-employed workforce. Some, like Jim, have been self-employed for years; others hang out their shingle later in life, often as part of a transition to retirement.

Regardless of how they came to be self-employed, they all will face retirement — some sooner than others (yup, the baby boomers will play their part). Financial professionals have a big opportunity to educate this audience of “soon-to-be-former business owners” as it advances into retirement. Because so many of them have a do-it-yourself mentality, they don't hook up with financial advisors until the final hour.

As a contractor, Jim was used to hiring sub-contractors and eventually found his way to Sparks, who works with Northwestern Mutual Wealth Management Company. But like other small-business owners Sparks advises, Jim didn't give up control easily.

“The first six months, they're following you around, checking you out,” Sparks says of his small-business owner clients. “They're doing their due diligence, finding out whether you'll do what you said you were going to do. But if you follow through and fulfill their expectations, they tend to be great clients for life.”


Retiring small-business owners are typically a wealthy bunch. Unfortunately, the same behaviors that helped them amass that wealth, like risk-taking and oversized self-confidence, are not the same ones that will necessarily keep them wealthy in retirement. In a sense, transitioning into retirement is like starting a brand new career in financial management. Does anyone really expect an untrained and poorly staffed industry amateur to perform his job well?

In fact, most of them do relatively poorly. Retiring small-business owners need help to understand that their behavior and decisions can cause quite common — and often costly — investment blunders. Perhaps the most costly blunder of all is the failure to hire qualified and independent financial advisors. Having switched into an industry for which they are not trained, they need assistance to manage the risks and return on their now-liquid asset portfolio. Or, to put it another way, they need to hire an investment team with the discipline to protect clients from themselves.


A common — and crucial — personality trait of successful business owners is their ability to tolerate high levels of concentrated risk. The majority of business owners taste failure and don't find it bitter. According to a recent Monthly Labor Review, published by the U.S. Department of Labor, more than 33 percent of business start-ups do not survive two years, and over 56 percent of business start-ups do not make it to their fourth anniversary. But many business owners try and try again until they succeed. Business owners have a high degree of familiarity with risk, and they also possess an unusually high tolerance for it.

Logically, surviving business owners also tend to have elevated levels of self-confidence in their ability to outsmart or outlast adverse conditions. Other studies have noted that self-made investors often have a strong sense of personal control over the risks they assume. In fact, they show that many people start a business in order to “be their own boss.” Poor risk calculation, overconfidence and an inflated sense of perceived control are classic challenges for individual investors generally. Successful business owners are especially susceptible to these and must be educated about effectively managing risk long term.

Another self-injurious behavioral trait of successful business owners is self-reliance. Studies show that businesspeople tend to “go it alone.” It is estimated that business owners work an average of 52 hours per week — almost twice the 34 hours put in by the average employee. Fifty-seven percent of small-business owners work six days a week; and 20 percent work all seven.

This penchant for self-reliance makes small-business owners think they can always do it best, and makes it harder for them to delegate their investment decisions to more-qualified professionals. How often have you heard a successful businessperson say, “Nobody cares about this money more than me?” While this may be true, it is obviously irrelevant when it comes to who can best manage those assets.


The behaviors that brought success to business owners — risk tolerance, self-reliance and self-confidence — can become the instruments of financial suicide. Long-term performance data suggest that people who have been successful concentrators of risk would do well to hire “risk diversifiers” — advisors who are capable of implementing a disciplined system that can help them manage long-term risks and return on their now-liquid assets.

Well-trained financial professionals ask themselves, “Am I that good, or did I just get lucky?” Retiring small-business owners must ask themselves the same question. Far too often, the investment acumen of amateur investors is little more than a timely reaction to the good short-term performance of a popular investment. Successful advisors must educate their small-business clients on how to manage and diversify risk.

How can registered reps best advise retiring small-business owners, many of whom are poorly equipped to act as their own investment counsel? There's no magic formula for earning a client's trust. But insight into the mindset of the entrepreneur could help the financial advisor better approach and manage these kinds of clients.

From the experience of other financial advisors, you can expect that they will only give up control reluctantly; they will need more assurances and more feedback and more explanation than most clients; they may advocate for risky investments; they will play back-seat driver; and, because they are smart and extremely driven, they might even have some ideas that are better than your own, or, at least, worth considering.

Wealth advisor Sparks advocates helping small-business owners by transitioning them from a tool they're familiar with — a business plan — to a financial plan.

“Our key to working with small-business owners is to develop a financial plan with the client,” Sparks says. “The more they think about the big picture, the less concerned they'll be about chasing rate of return.”

Develop a sound plan. Keep your clients educated, informed and engaged. Challenge them with the facts. Warn them of missteps. Be confident in your expertise. And never forget who's boss.

Stephen P. Wood, Ph.D., resides in New York and is senior Portfolio Strategist for the Tacoma, Washington-based Russell Investment Group.

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